Handbook of Asset and Liability Management: From models to optimal return strategies

7

Internal Transfer Pricing or Fund Transfer Pricing (FTP)

Le bon marché coûte cher.

7.1 PRINCIPLES

FTP's main principle is simple: to find a suitable internal fictitious price for the product sold by the different business lines (i.e. by the different Commercial Divisions to the various customers of the company). This FTP exists when the business is the main guide of the activity and when this activity does not depend on the financial markets).

The question arises, for example, for the internal transfer price of loans: at which price should the ALM buy back for the Retail Banking Department each new mortgage loan?

In an insurance company, at which price should each new insurance contract be repurchased internally?

The following sections will explain in details the FTP principles.

7.1.1 Integral financial risk transfer from commercial businesses to ALM

FTP defines the limit between the Commercial Department and the Financial Department (i.e. the ALM Department).

The Commercial Department's goals are simple:

• to sell products;
• to optimize the mix-product;
• to pilot the market share piloting;
• to establish the margin policy.

The Commercial Department has no time to spend on market financial operations, for example managing the interest rate and liquidity risk or earning money with an exposure on the financial markets.

In the ALM committees (ALCO), the Commercial Department representatives may take part in strategic decisions (commercial actions will indeed affect the evolution ...