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Funds Transfer Pricing
Riskworx was approached by a consulting company that required our quantitative skills to build a multiple-pool approach Funds Transfer Pricing (FTP) model for their client, a Tier 2 bank in sub-Saharan Africa.
The bank currently uses a single pool FTP model which makes it impossible to assess the performance of individual business units or to understand the value of its product offerings.
The model that we built pools the bank’s assets and liabilities according to the 5 market sectors served by the bank: retail, corporate, SME, agriculture & government. This allows them to assess how much each product contributes, per sector, to overall profitability, in terms of funding & application of funds.
Our brief was to avoid using complex curve structures so that the different operational departments can buy into the new methodology. The curves we constructed have only a liquidity premium and a credit spread on top of the risk-free curve; the latter being constructed using their country’s government securities.
“Our brief was to avoid using complex curve structures so that the different operational departments can buy into the new methodology.”
The FTP model serves as a guide to future pricing and provides appropriate incentives for the contribution of liquidity from the different business units. It also enables netting off liquidity across business units, funding liquidity mismatches at an optimal cost, and centralised deployment of surplus liquidity.