Insights

Do You Trust Your Strategic Compass?

TAKE A RENEWED LOOK AT FUNDS TRANSFER PRICING PRACTICES

Pave the way towards better decision making

Traditional views of profitability have changed for financial institutions. Since the financial crisis, the regulatory regime for banks has evolved significantly, making it difficult to keep pace with new requirements.

To achieve sustainable profitability and meet higher standards for performance management, financial institutions need well-calibrated methodologies, stronger governance and reporting, and the ability to capture granular information quickly and effortlessly.

 

An effective Funds Transfer Pricing framework is a large piece of the puzzle for enabling robust performance management in the post-crisis world.

Within many banks, Funds Transfer Pricing (FTP) frameworks were implemented a decade or two ago, and are long overdue for an upgrade. As the profitability landscape has dramatically shifted due to new capital, funding, liquidity regulations, and continued shareholder focus on improving returns, several institutions are beginning large-scale FTP upgrades. As a result, leading industry practice on FTP and broader performance management metrics are evolving rapidly.

The journey to target state FTP requires significant planning, business engagement, and resources to implement. Our paper presents key actions required to successfully deploy an effective FTP framework. The insights are a combination of Oliver Wyman experience advising clients with FTP as well as the findings from our 2017 FTP Survey that included 27 banks with a North American presence.


Advancements in capabilities

FTP frameworks offer firms valuable tools for strategic decision making and incorporating the costs of financial resource constraints. When a well-defined system is deployed, it helps to incentivize prudent risk-return tradeoffs and better understand how specific products and business lines affect the overall profitability of your firm.

 

THE CASE FOR CHANGE: Answers 2 Questions
  • 1WHY IS FTP IMPORTANT?

    Miscalculating FTP can be costly to financial institutions, ranging from the loss of revenue or clients in the short term to significant profitability decline over the longer term.

  • 2WHY DOES FTP NEED TO CHANGE?

    Changes in financial regulations have significantly altered the profitability landscape. Reduced bank profitability has placed a higher burden on institutions to optimize the deployment of scarce financial resources while improvements in data and systems are enabling new capabilities to enhance calculation speed and granularity.

Effective profitability management will be a key differentiator over the next decade, with FTP being a critical component.

Deploy a better FTP framework

For Funds Transfer Pricing to be effective, business unit level incentives created through the framework must be aligned with the firm’s overall goals. However, designing a framework that achieves this can be challenging, especially in cases where the specification of the FTP methodology requires significant judgment or deals with inherent uncertainty or complexity.

Banks can often struggle to select the most appropriate methodology given the lack of a clear industry standard. The exhibit below highlights three examples with significant divergence in industry practice, where methodology selection should be guided by which option promotes the institution’s desired strategic objectives. For example, re-visiting the cost of funds curve specification will be a critical step in the coming year given the industry transition away from LIBOR.


DETERMINE METHODOLOGY BASED ON STRATEGIC GOALS



The Path Forward

Technology, data and industry practice are rapidly improving as a small group of industry leaders forge the path to better performance management and higher returns. Making the investment today to holistically review and upgrade FTP frameworks will reap significant financial benefits in the future.

Read Our Report


DO YOU TRUST YOUR STRATEGIC COMPASS?

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