Funds Transfer Princing, Methods, Applications and Challanges in the Current Market

Alessandro Conciarelli, Pasquale La Ganga and Pasqualina Porretta

Banca Impresa Società, 2013, issue 1, 79-112

Abstract: One of the causes of the recent international financial crisis in the banks is dueto the lack of robust and effective methods to set prices for the internal transferof funds (Funds Transfer Pricing or FTP). This has accelerated the redefinition ofthe liquidity pricing and allocation regulatory framework and reaffirmed the fundamentalrole of FTP system as part of the liquidity management. Despite the valuablebank's technical, organizational and methodological progress, further refinementswill be needed in the techniques used, so that the FTP system become aneffective competitive tool in measuring the profitability/risks and in the efficientcapital and liquidity allocation.The aim of this paper is to illustrate an approach to determinate the funds transferrates (so-called TIT) of intragroup liquidity, although more sophisticated thanthe ones in the literature or currently used in the market - which are briefly reviewed- in order to reflects the most recent regulatory requirements and to be inline with the current market environment.The methodology, first and foremost, aims to effectively integrate the liquidityrisk in the process of FTP (pricing and hedging) in a dual perspective: macroeconomicand microeconomic. As regards the first, the paper shows a possible applicationof the FTP as an analysis tool of the spread on banks' wholesale funding costto capture phenomena of systemic risk or tension on the credit risk. On the secondperspective, the paper emphasizes the use of FTP as a tool to promote consistency between business strategy, liquidity allocation and incentives system between the differentbusiness units.

Keywords: Liquidity Risk; Funds Transfer Pricing; Liquidity Pricing. (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:mul:jqmthn:doi:10.1435/73811:y:2013:i:1:p:79-112

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