Abstract

One of the causes of the recent international financial crisis in the banks is due to the lack of robust and effective methods to set prices for the internal transfer of funds (Funds Transfer Pricing or FTP). This has accelerated the redefinition of the liquidity pricing and allocation regulatory framework and reaffirmed the fundamental role of FTP system as part of the liquidity management. Despite the valuable bank's technical, organizational and methodological progress, further refinements will be needed in the techniques used, so that the FTP system become an effective competitive tool in measuring the profitability/risks and in the efficient capital and liquidity allocation. The aim of this paper is to illustrate an approach to determinate the funds transfer rates (so-called TIT) of intragroup liquidity, although more sophisticated than the ones in the literature or currently used in the market - which are briefly reviewed - in order to reflects the most recent regulatory requirements and to be in line with the current market environment. The methodology, first and foremost, aims to effectively integrate the liquidity risk in the process of FTP (pricing and hedging) in a dual perspective: macroeconomic and microeconomic. As regards the first, the paper shows a possible application of the FTP as an analysis tool of the spread on banks' wholesale funding cost to capture phenomena of systemic risk or tension on the credit risk. On the second perspective, the paper emphasizes the use of FTP as a tool to promote consistency between business strategy, liquidity allocation and incentives system between the different business units.