Research On Commercial Bank Internal Funds Transfer Pricing Based On Interest Rate Term Structure

Funds Transfer Pricing refers to pricing mechanism of funds flowing within the different branches, different departments and different products in commercial banks(FTP). FTP is one of the key tools in Asset and Liability Management, the application of which is quite meaningful for commercial banks in China. FTP can help commercial banks with interest rate risk management, product pricing, assets allocation and performance evaluation. The commercial banks in China have to face the interest risk when it becomes market-orientation more and more. According to the practices of many famous international banks, one effective method to manage interest rate risk is to setting up Internal Funds Transfer Pricing system, which can centralize the interest rate risk into Funds Center, who is specialized in managing interest rate risk. Thus, the mechanism of internal transfer fund pricing in commercial bank causes the concerns and research from more scholars.FTP arose from commercial banking practice while research on it within banks usually stays in practical operation and pay no attention to quantitative analysis. Moreover, research on FTP in China dwells in the analysis of conception, principle and function, which is quite immature. Foreign theoretic study of interest term structures is abundant, but unsuitable for Chinese interest rate management mechanism;Generally speaking, the final FTP price of an asset or a liability is obtained by three steps. First, design FTP curve(s) which provide a basic prices system; second, constitute FTP method, as to transform the nominal term of an asset or a liability into the actual term, which can help us to find the corresponding FTP price; Third, adjust the FTP price, because of the liquidity difference, optionality and strategic demands.The article tried to come up with a more suitable way for domestic commercial banks to set up a FTP curve which is fit for the current CNY market situation. This paper is focus on the yield curve constructing, we construct the yield curve of loan and deposit funds based on Interest Rate Term Structure. Also, it founds a transition module for the internal transferred fund pricing according to the imperfect actuality of finance environment in China.