Funds Transfer Pricing (FTP)

Funds Transfer Pricing (FTP) is an internal bank treasury system that assigns a notional cost of funds to every loan a bank makes and a notional credit for every deposit it takes in, so that each business line's true profitability can be measured separately from the bank's overall balance sheet and funding decisions. Without FTP, a lending unit that makes loans would appear automatically profitable just because it charges interest, while the deposit-taking unit that actually supplied the cheap funding behind those loans would get no credit for doing so.

FTP is a core function of Treasury Management (TM) inside a bank, closely tied to interest rate risk management and liquidity risk management. It should not be confused with the unrelated tax and accounting concept covered under Transfer Pricing, which governs pricing between related legal entities for tax purposes; FTP is purely an internal management accounting tool used to allocate funding costs and benefits within a single bank.

Picture a household where one person earns money at a job and another person spends that money running the family car and paying the mortgage. If you only looked at the spender's side of the ledger, it would look like the household is losing money every month, and the earner's contribution would be invisible unless you specifically tracked who supplied the cash that made the spending possible. FTP is the accounting trick that makes that contribution visible inside a bank: it charges the lending side of the bank a fair internal rate for the money it uses, and pays the deposit-gathering side of the bank a fair internal rate for the money it supplies, so both sides get properly credited or debited for what they actually contribute.

Once that internal pricing is in place, management can see clearly which parts of the bank are genuinely creating value and which are just moving money around at a loss once true funding costs are accounted for.

A bank's treasury function typically derives FTP rates from a market-based yield curve, often tied to the relevant Interest Rate Swap curve or interbank reference rates, adjusted for the specific maturity and liquidity profile of the asset or liability being priced. A 30-year fixed mortgage is charged an FTP rate reflecting long-term funding costs, while a short-term consumer loan is charged a rate reflecting much shorter-term funding, even if both loans sit on the same balance sheet at the same time.

• The shape of the Yield Curve, since FTP rates are generally pulled from points along it matching each asset or liability's maturity.
• A liquidity premium added on top of the base curve, reflecting the cost of holding Unencumbered Assets as a buffer against funding stress.
• Behavioral assumptions about how long "sticky" deposits, like checking accounts, are expected to actually stay on the balance sheet before being treated as a different effective maturity.
• Regulatory funding costs tied to measures like the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), which raise the true economic cost of less stable funding sources.

By isolating funding costs and benefits, FTP lets a bank calculate a cleaner version of Net Interest Margin (NIM) at the business-unit level, separating the margin a lending team earns from genuine credit spread and fees from the margin that simply reflects the shape of the yield curve on the day a loan was made. This separation is central to performance measurement, compensation decisions, and strategic choices about which products and business lines a bank should grow or shrink.

Day-to-day responsibility for maintaining and defending FTP curves sits with Treasury Operations, which must balance the competing interests of lending units wanting low internal funding costs and deposit-gathering units wanting high internal credit for the funding they bring in. Getting this balance wrong has knock-on effects for Working Capital decisions across the bank's business lines, since a mispriced internal rate can make an otherwise sound product line look artificially unprofitable or artificially attractive.

FTP frameworks vary across banks but generally converge on using observable market curves adjusted for internal liquidity and credit considerations, with larger banks running increasingly granular, multi-curve FTP systems that price different currencies, maturities and product types separately rather than using one blended internal rate for the whole balance sheet.

FTP is only as good as the assumptions behind it, and poorly calibrated behavioral assumptions about deposit stickiness or liquidity premiums can distort which business lines look profitable, sometimes rewarding units for taking on hidden interest rate risk or liquidity risk that only becomes visible to the whole bank during a stress event. Because FTP is an internal management tool rather than an externally audited figure, results are also not directly comparable between different banks.

• Basel Committee on Banking Supervision