Funds Transfer Pricing Of Commercial Bank

Funds Transfer Pricing refers to pricing mechanism of funds flowing within the different branches, different departments and different products in commercial banks (FTP). FTP is one of the key tools in Asset and Liability Management, the application of which is quite meaningful for commercial banks in China. FTP can help commercial banks with interest rate risk management, product pricing, assets allocation and performance evaluation.In China, steadily advancing market-based interest rate reform is of outmost importance in China's financial reform. In the early years of reform, emphasis was placed on ironing goods prices. Starting from late 1990s, priority has been given to rationalization and market-based reform of production factors price. Market-based reform of interest rate, which is the price charged on credit funds, one of the important production factors, constitutes a vital integral part of the liberalization process of production factors price. The reform was launched and advanced based on worldwide experiences and the strategy mapped out by the CPC Central Committee and the State Council. The broad guiding principles are to liberalize interest rates of the money market and bond market before those charged for deposits and loans.As the market-based interest rate reform deepens, it becomes increasingly urgent for financial institution to improve their interest rate pricing and risk control systems, which in turn determine the pace of interest rate liberalization. According to the Principle for the Management of Rate Risk formulated by the Basle Committee, the primary forms of interest rate risk to which commercial banks are typically exposed include repricing risk, yield curve risk, basis risk and optionality, all of which can be found in China commercial banks to some degree.According to the practices of many famous international banks, one effective method to manage interest rate risk is to setting up Internal Funds Transfer Pricing system, which can centralize the interest rate risk into Funds Center, who is specialized in managing interest rate risk.Under FTP system, there are three sorts of departments in one commercial bank:Funds Supplying Department, Funds Demanding Department and Funds Center. According to FTP, all fund that absorbed by Funds Supplying Department should be input into Funds Center with a FTP prices; All funds that used by Funds Demanding Department should acquired from Funds Center also with FTP prices. The chief responsibility of Funds Center is to matching the term, the interest rate and the amount of all kinds of funds, and managing the interest rate risk which results from mismatch of funds.Generally speaking, the final FTP price of an asset or a liability is obtained by three steps. First, design FTP curve(s) which provide a basic prices system; second, constitute FTP method, as to transform the nominal term of an asset or a liability into the actual term, which can help us to find the corresponding FTP price; Third, adjust the FTP price, because of the liquidity difference, optionality and strategic demands.There are altogether 10 parts in this paper, and the innovations lies on the following aspects.First, with using charts and diagrams, this paper lay out all kinds of interest rate risks in commercial banks, then put forward the basic FTP pricipals to transfer interest rate risks.Second, this paper contrast the three typicial models of FTP by data and exampals mainly in the extent of interest rate risks transfering, above which we can give a suggestion to commercial banks in choosing FTP modle.Third, about FTP curves, considering the interest rate administrating frame of China, design three ways for commercial banks to chose.Fourth, profit from my daily work, I can assort different FTP methods to different operations of commercial banks, and attempt to search new FTP methods in proprietor and losing reserves.Fifth, propose two methods to solve the problem of profit losing caused by options of customer, one is price spill before exertion of options, the other is compensative charge after exertion of options.Sixth, this article combined FTP with Economic Capital Management, which is another important management method in modern commercial banks. Also, there is contrast between the two.Seventh, there is relationship analyzing between internal pricing and external pricing, such as loan pricing, savings pricing, bank bills pricing and so on.