Fund Transfer Pricing Essay Example | Topics and Well Written Essays - 500 words

Fund Transfer Pricing - Essay Example A method used to measure the performance and profitability of banks, therefore, should put into 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 the 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 the profitability of banks since the net interest margins arrived at, as a result, is what contributes to the determination of performance and profitability of banks. FTP reflects perspective market prices, including maturities and repricing 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 the 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.