It is critical for any financial institution to understand the rewards earned for given levels of risk taken. It is also critical to understand the relative contribution made by each business unit, by each product and by each customer relationship.
Funds transfer pricing (FTP) allows cost of funds (assets) or value of funds (liabilities) to be assigned to every transaction making up the balance sheet. It decomposes the interest margin into a credit spread, a funding spread and a rate risk spread. From a profitability/performance measurement perspective, Vision provides sophisticated solutions that determine the cost and value of funds on an economic basis, reflecting market rates, liquidity premiums, credit ratings, prepayment behavior and the underlying cash flow characteristics of a transaction.
From an Asset Liability Management or Risk Management perspective, simulating the components of future margins under different economic and rate scenarios helps the funding center(s) determine hedging strategies and the business units / product manager to remove the impact of movement of market rates from their future income.