BIAN Working Group Analytics

_{Published on July 13, 2009}

Business Sub Domain: Profitability Valuation - Funds Transfer Pricing
Business Sub Domain: Profitability Valuation - Standard Cost Allocations

Summary
The aim of the service group profitability valuation is to define service operations for Funds Transfer Pricing (FTP) and Standard Cost Allocations in order to calculate customer, product, organizational or channel profitability.

In general, the bank‟s controlling department is in charge for profitability valuations as it allocates costs from the bank‟s operations to bank products. Profitability analysis is mostly relevant to retail, private and commercial banking in order to control the (mass) business with the customers. Other businesses such as capital markets (i.e. derivative business) do not require standard methodology like FTP in an automated way. Those transactions will be controlled within the front office on the actual deal basis.

The profitability analysis within a bank is based on the philosophy, that each and every deal could theoretically be funded through the market, either directly and called market rate pricing or indirectly through the banks treasury department. The latter is called funds transfer pricing. Following this methodology, the controller is able to define funding costs for an asset or funding income for a liability product.
Together with the interest costs or revenues coming from the accounting the controller will calculate the net interest margin. In order to come up with a contribution margin (scheme) for a customer, product or organizational unit of the bank, the service operation “Cost Allocation” will assign i.e. standard and risk costs to reflect the bank‟s operations.

The profitability valuation in general is based on single deal level. However, aggregated costing is possible as well. Services like cash flow generation, NPV calculation or market data provision are being considered part of cross analytical data and methods. Reporting will be provided from Enterprise Level Reporting, Strategy and Management.

The service operations funds transfer pricing and cost allocations are relevant for the lifecycle of a deal, from planning and origination to
reporting and event handling (i.e. rollover, unscheduled payments).

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