The effectiveness of Funds Transfer Pricing in a commercial bank

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Table of Content

CHAPTER 1: INTRODUCTION3

1.1Purpose of the study3

1.2Context of the study4

1.3Problem statement4

1.4Significance of the study4

1.5Delimitations of the study5

1.6Definition of terms5

1.7Assumptions6

REFERENCES9

CHAPTER 1: INTRODUCTION

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 performances FSI comprehend the truth that you cannot effectively manage without measured insights. Some FSI have failed to pursue the significant strategic value offered by FTP because of their lack of knowledge, concerns related to cost and time involved and a mistaken belief that their current measurements are adequate. Shrinking industry net interest margins are accenting the need for FTP. Falling PC-based FTP technology costs are expanding the affordability and scalability of this proven solution. These market factors, coupled with high performing FSI's demonstrated FTP success and heightened regulatory demand for better risk-based pricing, resoundingly rebut the rationality of this inaction. Therefore, reasonable implementation time is required (Rosenbaum, 2009).

1.1Purpose of the study

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant facts relating to Funds transfer pricing (FTP) in commercial banking. The thesis will present the concept of Funds transfer pricing (FTP), a process of interest income attribution to internal contributors on various levels. In the thesis, the author will discuss the concept of FTP in the context of commercial banking.

1.2Context of the study

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 and effectively managing customer profitability. Simply put, a FSI cannot measure customer profitability without a sound and proven net interest margin allocation methodology as provided by instrument level matched-term FTP (Riggs, 2008).

1.3Problem statement

The analysis of the impact of using Funds transfer pricing in a Commercial Bank

1.4Significance of the study

This study is significant because, it provides some valuable insights regarding the benefits of using FTP in a commercial bank. Eventually, the information from this thesis can be used by ...