Funds Transfer Pricing (FTP): How Banks Measure the Real Margin

From FTP spreads to contribution margin by business area, region and branch.

What Is Funds Transfer Pricing?

Funds transfer pricing (FTP) sets the real cost of money for the bank behind every loan and deposit, expressed as an internal FTP rate. That rate is a base rate taken from the yield curve plus the FTP spreads each institution defines, such as liquidity, optionality and regulatory spreads. The rate the bank applies to the customer minus the FTP rate is the contribution margin: what each contract really earns once the cost of the money behind it is taken out.

Why Is a Margin Without FTP Not a Real Margin?

A margin calculated from accounting figures and an average funding rate charges every product the same cost of money, whatever its term, its liquidity or the options its customer holds. It hides the specific funding cost of each product, so a bank can grow volumes that end up with a negative contribution margin while overlooking the activities that create the most value. Because FTP decides how each unit's profitability is measured, it also shapes commercial behavior: targets based on volume reward growth, while targets based on contribution margin reward profitable growth.

What Did the Rate Cycle Expose?

With rates close to zero, the cost of funding was almost invisible in bank margins. When rates rose in 2022 and 2023, net interest income jumped, and many institutions could not easily say how much came from commercial activity and how much from rates. McKinsey's Global Banking Annual Review 2024 estimates that without that tailwind, industry return on tangible equity in many geographies would have been about 8%, near or below the cost of capital. Whichever way rates move next, what matters is which products, areas and branches stay profitable once the rate effect is taken out.

How Should Banks Calculate the Real Margin?

When FTP relies on spreadsheets, simplified curves and average assumptions, it remains a reporting exercise rather than a management tool. An effective framework calculates the base rate and each FTP spread contract by contract, with real market curves and market-standard methodologies, and runs overnight from source data to operational systems without manual intervention. At one global systemically important bank (G-SIB), the calculation processes millions of contracts in about 30 minutes, using the same assumptions as the bank's management and regulatory metrics.

What Will You Learn in This Whitepaper?

• The FTP rate: the base rate and the liquidity, optionality and regulatory spreads, followed through a single 30-year mortgage
• The business consequences: products sold at a loss, commercial effort in the wrong place and targets set on the wrong number
• The rate cycle: what rising and falling rates revealed about how banks still calculate their margins
• Calculation and platform: contract-level FTP, automated overnight, on one set of assumptions shared with liquidity and regulatory metrics
• The steering loop: measuring, projecting and simulating decisions such as a debt issuance before acting, by product, business area, region and branch

Who Is This Whitepaper For?

Treasury, ALM, FP&A and management control teams, CFOs and the business heads whose targets depend on how margin is measured. It starts from the foundations, so readers new to FTP can follow it from the beginning.

About the Author

Álvaro Nieto is Head of Product at Mirai, responsible for product strategy, support and presales. After executing international ALM projects across Europe, Latin America and the United States, he started the Mirai Platform from scratch and has led its development for the past ten years, taking it to clients in multiple geographies, including a G-SIB.