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Executive Summary: Do you know where your profits come from? Do you know which products or customers create value for the financial institution ("FSI") and which destroy it? Sadly, most FSI today do not have the measured answers to these questions. And too often the intuitive answers are at best misleading or frequently wrong. Currently most FSI simply price loans and deposits to mimic their competitors, who generally have different strategies, goals, risk tolerances and cost structures. Increasingly, however, high performance FSI wishing to create a winning competitive advantage use matched-term funds transfer pricing ("FTP"). These high performance financial institutions use FTP'S insights to create strategic value and optimize net interest margins. This article discusses the basics of matched-term funds transfer pricing. Current FTP best practices used by FSI world-wide, introductory insights into FTP'S strategic value and tips for getting started are also covered.
Financial institutions ("FSI") eagerly seeking a competitive advantage understand and pursue the substantial strategic benefits derived from best practice matched-term funds transfer pricing ("FTP") at the instrument level. Matched -term FTP is widely embraced by high performing FSI that recognize it as a critical path to enlightened risk and return net interest margin analytics as well as key to optimize margin performance. These high performance FSI comprehend the truth that you cannot effectively manage without measured insights.
Roles and Strategic Benefits
Funds transfer pricing is an internal management information system and methodology designed to allocate the net interest margin between funds users, such as lenders and investment officers, and funds providers, including branch deposit gathers and the treasury function. Equally true and more pragmatic is the definition of FTP as a rigorous measurement and pricing method based upon the pretense that all funds are bought and sold in an open market. Best practices matched-term FTP establishes a framework for this net interest margin allocation process by incorporating this market pretense concept.
Since FTP fosters improved understanding and valuable strategic insights related to the single largest contributor of a FSI's financial performance, the net interest margin, its importance cannot be over emphasized. Increasingly FSI executives acknowledge FTP as the most essential component of a well developed and comprehensive profitability measurement system. Matched-term FTP is the only path to measuring, understanding...