There are several ways of calculating TP for various financial instruments. The Matched Maturity Method is widely adopted by Financial Services institutions as it is more robust. We will use this method for further examining FTP. Certain adjustments require to be done to the Base Yield Curve to reflect the actual cost of funding for the bank.
Since all further calculations and analyses are dependent upon the choice of the Base Yield Curve, certain points need to be considered before accepting it 1 —. Since different transactions have different kinds of financial risks, certain adjustments are required for the financial risks inherent in contracts. Similarly, different financial products have different financial characteristics, so adjustments are also required to incorporate instrument-specific characteristics. Components of adjustments to be considered before finalizing the Transfer Price are —.
Once all adjustments are done, a typical daily FTP curve for assets or liabilities may look like as depicted below. Since FTP rate is assigned to each contract level based on the characteristics of the contract, it becomes easy to accurately derive customer profitability.
This means the bank is earning a spread of 1. The FTP system therefore helps analyse which customer is adding or decreasing value for the bank. Similar to customer profitability, the analysis can be extended to a product or a set of products to analyse which products are more profitable.
Once each contract is assigned a unique FTP rate based on the financial instrument and characteristics of contract, it can be aggregated to gauge profitability at a product level. A good FTP framework helps a bank understand how well its product is priced when compared to the cost of funding and cost of adjustments. It provides a guidance to price the product correctly to generate adequate return. For example, a relationship manager may want to throw in a deal sweetener to achieve his monthly target, but a good FTP system will show negative or low spread and will restrain him from doing so.
The graph below depicting how branches performed last quarter can be used to track and monitor performance at one glance. The table below shows the performance of 12 loan officers for the past quarter.
This report clearly shows Officer OC8 did a commendable job in loan origination and earned significant profitability for the bank. Future interest rates can be estimated based on the term structure of interest rate, which is eventually used in the FTP system to set annual profitability targets for products or Business Units.
There are several ways to measure and report business performance. While traditional metrics or tools such as Financial Analysis provides a bigger picture of the bank, Funds Transfer Pricing is a powerful analytical tool that helps a bank monitor its performance in numerous ways, given its wide application in multiple areas. A good FTP system can enhance the decision making capabilities of the bank across resource allocation, cost control and budgeting and planning to raise profitability levels.
There are many ways to measure and report business performance. But they fail to measure performance at granular levels branch, area, officer, etc. A well designed FTP system can deliver several benefits such as —. Well crafted article, Liked the flow and the Information content.
The insights that can be derived from FTP is really treasure trove for an banking organisation. You have the gift of making unnecessarily complicated things look simple.
Well articulated. Thanks for taking the time and sharing. Otherwise great. Save my name, email, and website in this browser for the next time I comment. October 22, October 21, October 20, October 15, October 1, November 9, November 3, October 14, October 12, October 11, November 8, October 5, September 23, September 16, September 13, September 3, September 2, September 1, November 10, October 28, October 26, October 7, October 4, September 24, September 20, July 1, December 17, October 9, A complete feature comparison of all of these new plans can be found here.
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