Economics · Funds Transfer Pricing
Under a 'Matched Maturity' Funds Transfer Pricing (FTP) framework in banking, what happens to a deposit-heavy branch's profitability during a rising interest rate cycle if it holds a large portfolio of long-term Fixed Deposits (FDs) locked in at low historical rates?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The branch profitability increases because its cost of funds is locked low, while the transfer credit it receives from the head office increases with rising market rates.✓
- 2The branch profitability decreases because the head office will only credit the branch with the historical rate at which the deposits were originally booked.
- 3The profitability remains neutral because the FTP framework always matches the customer rate with the head office credit regardless of maturity.
- 4The branch profitability decreases initially but then rises sharply as old deposits mature.
Correct answer
The branch profitability increases because its cost of funds is locked low, while the transfer credit it receives from the head office increases with rising market rates.
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