Funds Transfer Pricing: Risk and Profitability Management

This workshop is unique in its exploration of the intrinsic relationship between risk and profitability management (see interview with Dr. Green). Dr. Green takes delegates through the transformative power his approach to balance sheet management has had for his clients around the globe. A comprehensive explanation of the logic and purpose of FTP will empower delegates to effectuate impactful changes at their organizations. Going beyond the theory, Dr. Green provides detailed explanations of the implications and pitfalls of bad practices that are often held out or perceived to be best or common practices; he cautions that just because other banks or credit unions, or even regulators and advisors, advocate specific methodologies and practices does not make them correct.

Delegates will come to appreciate that banks and credit unions are in the business of maturity transformation and are, therefore, intrinsically exposed to IRR and LR. These makes FTP an essential business management process for effective and meaningful risk and profitability management. Effective balance sheet management requires that IRR and LR be identified, priced, and transferred to the mismatch center where they can best be managed by ALCO; any meaningful analysis of bank, business unit, or product profitability must follow logically from this process. To quantify profits without explicitly and accurately acknowledging the contribution of IRR and LR is to manage by fiction.

Dr. Green also explains that executive management must comprehend why FTP must function in a specific and deliberate way and support efforts to implement and operate FTP correctly. Risk and profitability management can only be successful if top-down enforcement of standards and accountability for properly-calculated earnings is an essential component of the FTP framework. A commitment to transparency and clarity is also necessary to change the tone of ALM/FTP manager-business segment conversations from adversarial and contentious to mutually beneficial; the understanding of earnings dynamics is enhanced at a granular level, and the interests of the bank and the business units are fully aligned.

The workshop also includes a discussion of the choice of all-in funding curve. When this curve properly reflects the cost of hedging IRR and LR, Dr. Green shows how IRR- and LR-related earnings are isolated in the Mismatch Center and how the earnings attributed to lending and deposit-gathering business units are immunized against IRR and LR. The choice of funding curve is a critical foundational component of the FTP framework that serves to clarify the cost of taking and managing IRR and LR; FTP rates which are derived from the curve reflect contemporaneous economic reality and support management desires to make well-informed balance sheet management decisions through the entirety of the business cycle.

Dr. Green also discusses behavioral modeling of NMDs, a necessity for every single depository institution. In addition to a comprehensive set of IRR and LR analytics, the NMD Model that he has developed has its own FTP rate calculator that is specifically designed to ensure the consistent treatment of NMDs in a wide variety of risk and profitability exercises.