Fund Transfer Pricing - Essay Example

Application of funds transfer pricing to measure bank profitabilityIntroductionFund transfer pricing (FTP) is a process used by banks to measure the performance of the different business units in the bank. FTP measures and integrates the performance of the various units such as branches and the various sections and sub sections (Sinha 2008). FTP is a process that incorporates all the aspects related to how banks raise deposits and how they advance loans to customers (Dermine 2009). Banks use funds transfer pricing to determine the interest earned by their assets and liabilities (Abdallah 2004).

Funds transfer pricing as a measure of bank profitabilityThe main performance of banks is dependent on loans and deposits. A method used to measure the performance and profitability of banks therefore should put to consideration the deposits and loans by banks thus considering the net interest. FTP is a management control technique that is used to calculate the true NIL component of profitability of business units, products, portfolios and customers (Suresh 2010). It is used to calculate the cost of funding assets and credit for funds provided inform of deposits.

This is mainly the net interest which is used in the income statement and balance sheet that consists of loans generated on the asset side and funds purchased from transfer funds pool on liability side.Fund transfer pricing is a method that banks use to internally measure, allocate and assign profit contribution value to funds collected from customer deposit, given out as loans to customers (Singh & Dutta 2013). Therefore, FTP is a component in measuring profitability of banks since the net interest margins arrived at as a result, is what contributes to determination of performance and profitability of banks.

FTP reflects perspective market prices, including maturities and reprising characteristics of corresponding assets and liabilities (Greuning & Brajovic 2003). It therefore helps the banks to determine the value of their assets in the capital markets and this further helps the banks in their investment decisions that are meant to increase their lending capacity. In addition, FTP places cost of use of capital inherent in the extension of credit to an obligor (Gross, 2006). In this way, it determines the profitability of customers, which helps the banks in making lending decisions.

FTP helps to calculate the cost of portfolio, which helps the bank in making loans and lending decisions (Saita 2007). FTP determines a banking portfolio, and transfer prices that apply to loans and deposit collection (Blessis 2014). Determination of portfolio helps banks to determine how much they can lend.ConclusionIn conclusion, FTP is a method used by banks to achieve what other profitability measures such as net assets and return on assets could not achieve. FTP determine banks profitability by considering the net interest, which is determined by the two main activities carried out by banks which are receiving deposits and offering lending services to customers.

It operates with all units of the bank for instance branches and considers the customers and portfolio all which sum up to determination of profitability.Reference listTop of FormSingh, K., & Dutta, V. (2013). Commercial bank management. New Delhi: McGraw Hill Education (India. Top of FormSaita, F. (2007). Value at risk and bank capital management. Amsterdam: Elsevier Academic Press. Bottom of FormTop of FormSuresh, P., & Paul, J. (2010). ManaTop of FormBottom of FormTop of FormBessis, J. (2014).

Risk management in banking. Hoboken, N.J: Wiley. Top of FormGreuning, H. ., Brajovic, B. S., & Johnson-Calari, J. (2003). Analyzing and managing banking risk: A framework for assessing corporate governance and financial risk. Washington, D.C: The World Bank. Top of FormSuresh, P., & Paul, J. (2010). Management of banking and financial services. Noida, India: Pearson. Top of FormSinha, P. K. (2008). Management control systems: A managerial emphasis. New Delhi: Excel Books. Top of FormAbdallah, W. M. (2004).

Critical concerns in transfer pricing and practice. Westport, Conn: Praeger. Top of FormDermine, J. (2009). Bank valuation & value-based management: Deposit and loan pricing, performance evaluation, and risk management. New York: McGraw-Hill. Top of FormSmullen, J. (2001). Transfer pricing for financial institutions. Cambridge, England: Woodhead Pub. Top of FormGross, S. (2006). Banks and shareholder value: An overview of bank valuation and empirical evidence on shareholder value for banks.

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