BEAVERTON, Ore.-Rich Weissman, president CEO of DMA, outlined five funds transfer pricing models, from simple to complex:


Traditional internal sources and uses. This is the most common approach-a standard and pooled approach. Individual deposits are compared to the institution's overall yield; individual loans are compared to institution's overall cost of funds (not tenor based). The process reflects how many smaller institutions operate. It is responsive and fully allocates net-interest margin without taking into account the external market.


Traditional internal matched funding sources and uses. This model is typically used by larger institutions that match fund and lock in rates to protect the institution's position. Preferred by the lending department as it does not "punish" past decisions that are affected by a changing interest rate environment as spread is built in; assumes loans and deposits were priced correctly, but slow on picking up new trends.


Internal yield curves sources and uses. Cost of funds and yield curves are created by remaining term on both internal deposits and internal loans without use of an external yield curve. The FI must consider how to extend the cost of funds curve beyond the longest tenured deposit (generally five-year CDs). The institution can use slopes from four years to five years and extend outward; and need to have large enough pools/portfolios to create yield curves.


External yield curve matched funding. This model is most common among those adhering closely to long-term ALM strategies. This is the most popular model selected when smaller institutions want more sophistication. It typically makes most sense to the finance team. Usually it is based on the most recent yield curve (FHLB, T-bills/ bonds, LIBOR). Usually remaining term is used and sometimes expected average duration is used.


External multiple yield curves matched funding. Products are matched to different yield curves based on interest rate risk since not all loans are at the same risk level. FHLB, Treasuries, LIBOR are yield curves most often selected in concert here and sometimes "blended." Usually remaining term is used, sometimes expected average duration is used.

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