Funds transfer pricing allocates funding and contingent-liquidity costs and benefits across a bank's products and business lines.
Funds transfer pricing (FTP) is an internal bank-management framework that charges business activities for the funding and liquidity they use and credits activities for the funding they provide. It separates customer pricing from centrally managed balance-sheet costs so product margins, risk-taking incentives, and business-line performance can be evaluated more consistently.
The singular form “fund transfer pricing” is also used, but U.S. interagency supervisory guidance uses funds transfer pricing.
A simplified bank structure has three roles:
The internal transfers do not mean treasury physically moves each deposit dollar to a particular loan. FTP is a management-accounting and risk-allocation mechanism. It gives each transaction or pool an internal funding price while centralizing structural balance-sheet risks.
For a loan or other earning asset, a simplified customer margin is:
For a deposit or other funding source:
These are not net profit formulas. Credit losses, operating costs, capital, insurance assessments, servicing, options, taxes, and other items still need appropriate treatment.
Assume a business line originates a $10 million five-year fixed-rate loan at 6.50%. Treasury assigns:
The simplified FTP charge is:
The lending unit’s customer margin before other costs is:
Applied to $10 million for one year under a simplified constant-balance assumption:
If the bank separately assigns an expected credit cost of 0.60%, that consumes another $60,000 and leaves $130,000 before operating expense, capital cost, taxes, and other adjustments. The example shows why a 6.50% customer rate is not the lending unit’s margin or the bank’s profit.
All values are hypothetical. A real FTP charge may be fixed at origination, reset with the product, or remeasured for management reporting under documented policy.
Assume a deposit portfolio receives an FTP credit of 3.60% because treasury values its modeled funding characteristics. The customer rate is 1.20%.
The 2.40% is a simplified deposit customer margin before servicing cost, deposit insurance, operational risk, marketing, and other allocations. A non-maturity deposit does not literally mature at the modeled date; its FTP credit depends on behavioral assumptions about retention, repricing, and runoff.
| Method | Core approach | Main limitation |
|---|---|---|
| Matched-maturity marginal funding | Assigns a point on the bank’s funding curve based on transaction characteristics | Requires reliable curves and granular cash-flow assumptions |
| Pooled or average-cost method | Applies an average rate to a group of products or balances | Can hide maturity and liquidity differences |
| Marginal cost of funding | Uses the cost of incremental secured or unsecured borrowing | Can be volatile and may not represent long-lived funding economics |
| Weighted average cost of debt | Uses an average cost across outstanding bank debt | Can preserve stale historical funding costs and distort incentives |
| Behavioral or replicating-portfolio method | Models noncontractual maturity and repricing, especially for deposits | Sensitive to customer-behavior and stability assumptions |
No method is universally correct. The framework should be proportionate to the bank’s size, products, legal entities, currencies, and risk profile.
Matched-maturity FTP attempts to assign funding components that reflect a transaction’s actual economic behavior.
For a five-year loan that reprices every three months, U.S. interagency guidance gives an illustrative approach in which:
Using one five-year fixed rate for both components could overstate interest-rate risk, while using only a three-month rate could understate the need to fund the asset over its expected life.
Depending on policy, FTP can include:
The bank should prevent double counting. If an option cost or liquidity charge is in FTP, the same cost should not be deducted again under another profitability label without a documented reason.
FTP generally addresses funding and liquidity economics. Other costs answer different questions:
| Cost or allocation | Main question |
|---|---|
| FTP charge or credit | What is the internal funding and liquidity value of the activity? |
| Expected credit cost | What loss is expected from borrower or counterparty default? |
| Capital charge | What return is required on allocated equity or regulatory capital? |
| Operating cost | What does origination, servicing, technology, and control activity cost? |
| Tax allocation | What tax effect is assigned under management policy? |
Combining all items into one unexplained hurdle rate makes product decisions hard to audit and can conceal which assumption changed.
An undrawn credit line may have no funded balance today but can create a cash need during stress. FTP can assign a charge for the cost of holding standby liquidity against modeled drawdowns.
Similar contingent needs can arise from:
The model should align, or explicitly reconcile differences, with liquidity stress testing and contingency-funding assumptions.
A sound FTP framework should define:
FTP should be understandable to the people whose decisions it affects. A precise model that business units can override informally does not create reliable incentives.
FTP is model-dependent and can materially alter internal profitability. Incorrect curves, behavioral assumptions, liquidity horizons, or centrally retained costs can reward the wrong activity. A framework can improve decision-making but cannot replace liquidity stress testing, interest-rate-risk management, capital planning, credit analysis, or sound judgment.
This page provides general financial education, not individualized banking, treasury, pricing, regulatory, accounting, or model-risk advice.
The cited U.S. interagency guidance has a stated institutional scope. Its principles should not be presented as a legal requirement for every bank or jurisdiction.