A Funds Transfer Pricing Application supporting banks in pricing liquidity risk
For accurate pricing of a bank’s products and for managing long-term liquidity risk, it is essential to have a sound method for calculating the transfer price. KnowCo’s Funds Transfer Pricing application (K-FTP) supports financial institutions in pricing liquidity risk in a manner compliant with internationally-recognised good practice.
A Strategic Management Tool
The K-FTP user is offered a comprehensive approach to Funds Transfer Price curves, based on selected yield curves and adding the institution’s cost of credit, liquidity buffer cost, cost-of-capital, operational costs and any other required premiums to those curves, per currency. Users can also define time buckets within the curves, and define rules automatically allocating FTP curves to accounts, based on the currency and account or portfolio type.
As a Funds Transfer Pricing solution, K-FTP enables the integration of different risk components to the notional interest curve and report on the difference between FTP and actual interest yielded and demanded by assets and liabilities respectively.
In short, K-FTP allows the user to more actively manage the firm’s long-term liquidity risk profile by adjusting interest rates per currency, per portfolio and per time bucket.
KFTP REPORTS
K-FTP produces a number of reports for the user to manage and monitor FTP costs effectively, including:
- Liquidity buffer cost and cost allocation: the actual yield per asset item per currency on buffer assets, the alternative asset yield and the difference between the two in percentage and monetary terms; this cost is then allocated to causal balances on both sides of the balance sheet, ie those maturing after (for inflows/assets) or before (outflows/liabililtes) a date horizon chosen by the user (default setting: 6 months).
- Weighted average maturity per portfolio and per account: this is an important tool in explaining to the business generating and using liquidity why accounts and portfolios attract the FTP pricing allocated to them
- Past and current FTP rates per time bucket, and their components
- yield curve
- credit spread and
- buffer cost, plus any other user-defined premiums per portfolio/currency.