A loan may earn interest and a deposit may pay interest, but neither product operates alone. Funds transfer pricing gives the bank an internal way to recognize how each activity uses or supplies funding and liquidity across the shared balance sheet.
One balance sheet supports many products
Loans, securities, deposits and unused commitments create different funding and liquidity needs. A long-term fixed-rate loan may require dependable funding for years, while an operating account can provide useful funding but may also be withdrawn when the customer needs it.
Without an internal allocation method, a business line can appear profitable because it receives revenue while the cost and risk of funding sit elsewhere. Funds transfer pricing, often shortened to FTP, connects product decisions to those shared balance-sheet effects.
A central function sets internal transfer rates
Treasury or another central balance-sheet function typically develops reference rates for relevant terms, currencies and liquidity characteristics. Assets may receive an internal funding charge, while qualifying deposits or other funding sources may receive an internal credit.
The framework can distinguish maturity, repricing timing, embedded options and contingent liquidity. It is an internal measurement system: an FTP rate is not necessarily the rate shown to a customer, an accounting entry that moves cash between legal entities or a promise that funding will remain available.
Product income is separated from funding value
Consider a simplified loan earning 6 percent that receives a 4 percent internal funding charge. The remaining 2 percent is not final profit; it still must support expected credit loss, capital, operations, servicing and other costs. The illustration simply separates customer pricing from the cost attributed to funding the asset.
A deposit can work in the opposite direction. The business pays the customer rate and receives an internal credit for the funding value the deposit provides. Product terms, expected customer behavior and liquidity assumptions influence that value.
The signal influences pricing and growth
If funding appears free, a business may originate assets whose reported return does not reflect their effect on liquidity or interest-rate exposure. If stable funding receives no appropriate value, teams may underinvest in relationships that support the bank during ordinary and stressed conditions.
A well-designed framework helps compare products on a more consistent basis and can inform pricing, limits, portfolio mix and performance measurement. It does not replace customer, credit, conduct or strategic judgment, and the cheapest internal rate should not determine every decision.
Governance matters because the result depends on assumptions
Transfer curves, deposit lives, early repayments, unused commitments and stress behavior are estimates rather than observable facts. Material assumptions need clear ownership, documentation, testing, challenge and periodic review as markets and customer behavior change.
The specific supervisory guidance cited below applies to defined large institutions, while FTP design at any bank should be proportionate to its size, complexity and activities. A useful framework is understandable enough for business users and controlled closely enough that reported performance does not reward hidden funding or liquidity risk.
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