Funds transfer pricing (FTP) allocates funding costs and benefits among a bank's businesses and Treasury. Liquidity transfer pricing (LTP) focuses on the liquidity component of that allocation. A lending business consumes funding; a deposit business supplies it. Charges and credits should reflect the timing and stability of the cash flows each business creates.
Without a meaningful charge, a loan desk can report an attractive spread on a long asset while Treasury bears the cost of funding it. Without an appropriate credit, a deposit desk has little incentive to obtain stable funds. Transfer prices make these economic effects visible in product pricing and performance measurement. They allocate responsibility; they do not eliminate the bank's aggregate risk.
Central Treasury typically implements the framework using consistent funding curves. Senior management approves policy and independent risk and finance functions challenge methods, assumptions and results. Business lines should understand the charges but should not choose favorable transfer rates for themselves. Clear governance includes documentation, exception approval, timely curve updates and review of incentives.
Common mistakes
- Using only final maturity. Successive principal cash flows have different funding horizons.
- Treating a transfer charge as an external hedge. Treasury can still fund at the wrong tenor or currency after assigning a correct internal price.
- Equating a currency hedge with stable funding. A short swap financing a long asset must be renewed.
Bottom line
- Transfer prices allocate funding costs and benefits using governed, consistent assumptions.
- Maturity-matched marginal pricing recognizes cash-flow timing and contingent needs.
- Currency hedges can leave maturity and rollover mismatches.
- Central-bank swaps supply dollars through foreign central banks, subject to access conditions.
Exam shortcut
Write the currency quote and rate tenor before using CIP. For gap problems, label the requested result as currency income, margin percentage or economic value. Then check reset timing, earning-asset denominator and duration convention before substituting numbers.
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