Funds Transfer Pricing: Risk and Profitability Management

To quantify profits without explicitly acknowledging the contribution of interest rate risk and liquidity risk is to manage by fiction.

Upcoming Webinars And Workshops

It is as important as ever to understand the relationship between risk and profitability; interest rates are back near zero, and liquidity spreads have demonstrated volatility not seen since the financial crisis more than a decade ago.

Given the current travel and in-person meeting constraints associated with the coronavirus, we've adapted our live workshops to a webinar format. In this four-part series, we cover the same content as is presented in the live workshop, and there is still an opportunity to interact with the workshop leader and your peers.


Funds transfer pricing (FTP) is an essential business management process that should accurately quantify the earnings associated with taking and managing interest rate risk (IRR) and liquidity risk (LR) AND immunize the lending and deposit gathering business units from earnings volatility associated with IRR and LR. Absent a well-functioning FTP process, a depository institution will have a strong tendency to improperly attribute risk-related earnings to lending, deposit gathering, and capital markets activities. The failure to properly attribute earnings will lead to a misallocation of resources and poorly-crafted product and performance management decisions; in addition, key sources of IRR and LR will not be identified, managed, or mitigated.

Delegates to the workshop are provided a comprehensive explanation of the theory of FTP, an explanation which is rigorously grounded in Dr. Green's deep knowledge of asset/liability management (ALM), profitability management, and strategic balance sheet management. Anecdotes from Dr. Green’s work with financial institutions around the globe over the last 25 years infuse the discussion to produce a compelling explanation of how FTP must be practiced in order to bring clarity to the analysis of risk and profitability through the entirety of the business cycle. A central premise of the workshop is that risk and profitability management cannot be treated as separate and distinct exercises; rather, they must be acknowledged to be one and the same, and FTP is the key to managing them consistently.


  • FTP is the process for determining how much money a depository institution makes by taking and managing interest rate and liquidity risk; this process is an essential component of the earnings management process at any depository institution regardless of charter type or balance sheet size
  • The lending and deposit-gathering business segments are the primary beneficiaries of a well-functioning FTP process because FTP immunizes business segment earnings against IRR and LR; conversely, the management of lending and deposit-gathering business is frustrated by poorly-constructed FTP methodologies
  • Meaningful margin analytics, earnings attributions, and ROE calculations are dependent upon properly-calculated FTP rates and spreads; weaknesses in FTP methodologies and processes impair the accuracy and usefulness of all profitability management functions which require FTP as an input
  • Risk and profitability must be modeled consistently if earnings are to be fully understood through the entirety of the rate cycle; separate data, cash flow models, behavioral models, or management frameworks will lead to multiple, inconsistent stories of how the depository institution makes money
  • The mismatch center, which is created when FTP is utilized to calculate the cost/credit for funds, should contain all IRR- and LR-related earnings; these earnings can be positive or negative but almost certainly never zero; the earnings in the mismatch center, which are the responsibility of ALCO, must be managed as rigorously as those in the lending, deposit gathering, and capital markets segments
  • The estimation and use of the base (swaps) and all-in funding (senior, unsecured debt) curves must be derived from the cost of hedging IRR and LR; any distortions or adjustments to the curve will result in earnings attributions for lenders and deposit gathers which are disconnected from economic reality; business segment earnings may not immunize from IRR and LR and the Mismatch Center will most likely be undercompensated for the level of IRR and LR risk in the balance sheet
  • The calculation of FTP rates for non-maturity deposits (NMDs) must follow logically from the estimation of their repricing and liquidity cash flow characteristics; any discrepancies in these calculations can lead to material errors in the quantification of IRR, LR and product profitability
  • The requirements of a comprehensive and well-functioning FTP framework are not well-understood by many bank executives and managers, regulators and their advisors; good information is sparse, bad practices proliferate, systems limitations are the norm, much time has passed since interest rates last rose, and substantive regulatory guidance has yet to evolve

Why You Should Attend

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.

Who Should Attend

This course is intended to benefit all members of a depository institution’s ALCO committee, ALM managers and their analysts, FTP managers and their analysts, liquidity managers, and their analysts, budgeting/forecasting managers, auditors, product managers, product profitability managers, performance management personnel, as well marketing directors. Regulators, central bankers, and academics will also benefit from the extensive discussions and applications of theoretical and conceptual modeling frameworks to real-world problems.

Pre-Course Questionnaire

A detailed questionnaire will be sent to each delegate to identify their specific training needs and elicit questions and topics they would like to see covered. The completed forms will be reviewed by Dr. Green; he will make every effort to ensure that the course speaks to these requests.

What Past Delegates Have Said About David's Funds Transfer Pricing Workshop

"I learned more than I thought I would! Great delivery - kept us all engaged. I would recommend to anyone wanting a better understanding of FTP." —CoBank

"Excellent course that takes into consideration the reality in banks versus how FTP should be applied. Strong math and great anecdotes." —BanReservas

"Excellent. I highly recommend to others on my team and those who are impacted by FTP." —Scotiabank

Registration Information

Nick Cook
Office: + (London)
[email protected]