FTP methodologies: single pool vs matched maturity

FTP Methodologies: Single Pool vs. Matched Maturity

There are two main ways to implement FTP: single pool methodology and matched maturity approach. They produce very different FTP rates and different business line incentives. Understanding the choice is fundamental to understanding how a bank allocates interest rate risk.

Single Pool FTP

Single pool treats all deposits and wholesale funding as a single bucket with a blended average cost. This is the simplest approach.

Mechanics:
1. Calculate weighted-average cost of all funding (deposits + wholesale)
2. Adjust for term structure (create a curve)
3. All business lines pay/receive the same FTP rate for the same tenor

Example: Bank with $100B funding sources:

• Non-interest-bearing deposits: $30B, cost 0%


• Interest-bearing deposits: $50B, cost 1.5%


• Wholesale borrowing: $20B, cost 4.5%


• Weighted average cost: (30B 0% + 50B 1.5% + 20B * 4.5%) / 100B = 1.95%

All business lines get credited/charged 1.95% for overnight funds (plus adjustments for term structure).

Advantages:

• Simple to implement


• Transparent (everyone uses same FTP)


• Reflects actual blended funding cost

Disadvantages:

• Doesn't recognize differences in funding source cost by business line


• Deposit business subsidizes wholesale funding users


• Doesn't incentivize deposit gathering

Matched Maturity FTP

Matched maturity (also called "matched funding approach") assigns specific funding sources to specific liabilities and assets, creating liability-specific FTP rates.

Mechanics:
1. Non-interest-bearing deposits fund overnight assets (charged overnight rate)
2. Interest-bearing deposits fund their specific maturity
3. Wholesale funding for mismatches (long-term assets not covered by long-term deposits)
4. Each business line pays FTP based on actual funding source cost

Example: Same bank as above

• Retail deposits (1.5% cost): Fund retail mortgages, consumer loans, short-term assets


• Non-interest-bearing deposits (0% cost): Fund liquid assets


• Wholesale funding (4.5% cost): Fund longer-duration assets not covered by deposits

Retail mortgage business is charged 1.5% FTP (matched to retail deposit cost), not 1.95%.
Wholesale-funded assets are charged 4.5%, creating incentive to match-fund assets and liabilities.

Advantages:

• Recognizes funding source cost explicitly


• Incentivizes business lines to match funding sources


• Rewards deposit gathering (lower cost funding gets lower FTP)

Disadvantages:

• Complex to implement


• Not transparent (different business lines have different FTP rates)


• Requires assumptions about which deposits fund which assets

Real Example: The Difference in Action

Scenario: Bank originates a $500K mortgage funded by retail deposits (cost 1.5%)

Single Pool FTP:

• FTP charge: 1.95% (blended rate)


• Business spread over FTP: 6.5% mortgage - 1.95% = 4.55%


• Deposit business also gets credited at 1.95% (losing money if they're paying 1.5% customer rate and only crediting mortgage business at 1.95%)

Matched Maturity FTP:

• FTP charge: 1.5% (actual deposit cost)


• Business spread over FTP: 6.5% mortgage - 1.5% = 5.0%


• Deposit business gets credited 1.5% and can pay customer 1.5% or less, making deposit gathering profitable

The mortgage business looks MORE profitable under matched maturity (5.0% spread vs. 4.55%), but that's because the deposit business is now less profitable. The overall bank profitability is the same.

Which Approach Do Banks Use?

Large banks tend to use matched maturity because:

• Sophisticated systems can handle complexity


• Creates better incentives (deposit business gets rewarded for low-cost deposits)


• More accurate capital allocation (high-risk assets matched to higher-cost funds)

Small/mid-sized banks often use single pool because:

• Simpler to implement and maintain


• Sufficient for their needs


• Less system investment required

The choice affects the entire incentive structure of the bank. Matched maturity drives more sophisticated ALM and better deposit management. Single pool is simpler but less precise.

FTP Methodologies: Technical Implementation

Single Pool Mechanics in Detail

Step 1: Aggregate all funding

Bank gathers data on all deposits and borrowings:

• Demand deposits (DDAs), interest-bearing deposits, CDs


• Wholesale borrowings (repo, commercial paper, senior debt, subordinated debt)


• Each with maturity, rate, and balance

Step 2: Calculate marginal cost of funds

Marginal cost = cost of funds if bank raises one more dollar of funding

This is typically a weighted average of:

• Next marginal deposit cost (what would the bank have to pay to raise $1M more in deposits?)


• Next marginal wholesale cost (what would the bank have to pay in the wholesale market?)

Example:

• Next $100M could be raised 60% via deposits at 1.5%, 40% wholesale at 4.5%


• Marginal cost = 0.6 1.5% + 0.4 4.5% = 2.7%

Step 3: Build term structure

Create FTP rates for different tenors:

• 1-month: 2.7% + 0% (short-term premium) = 2.7%


• 3-month: 2.7% + 10bps = 2.8%


• 6-month: 2.7% + 25bps = 2.95%


• 1-year: 2.7% + 50bps = 3.2%


• 5-year: 2.7% + 100bps = 3.7%


• 10-year: 2.7% + 150bps = 4.2%

The premium reflects the cost of longer-term funding (interest rate risk).

Step 4: Apply to all assets and liabilities

Mortgage business charges 3.7% for a 5-year mortgage (FTP 3.7% + business spread).
Retail deposits get credited 3.7% for 5-year maturity (if matched to that tenor).

Matched Maturity Implementation

Step 1: Categorize funding sources

• Core deposits (non-interest-bearing, stable): 0% cost, unlimited supply
• Sticky deposits (interest-bearing, less price-sensitive): 1.5% cost, limited supply
• Hot deposits (rate-sensitive, price-elastic): 2.5% cost, very limited supply
• Wholesale funding (repo, bonds): 4.5% cost, market-priced

Step 2: Assign funding sources to liabilities/assets

• Core deposits (0%): Fund a portion of floating-rate loans, volatile-balance assets
• Sticky deposits (1.5%): Fund mortgages, consumer loans, retail balance sheet
• Hot deposits (2.5%): Fund competitive retail products
• Wholesale (4.5%): Fund long-term assets, strategic initiatives

Step 3: Create funding source-specific FTP rates

• For assets funded by core deposits: Credit/charge 0% FTP (overnight) + term premium
• For assets funded by sticky deposits: Credit/charge 1.5% FTP + term premium
• For assets funded by hot deposits: Credit/charge 2.5% FTP + term premium
• For wholesale-funded assets: Credit/charge 4.5% FTP + term premium

Example: A 5-year mortgage funded by retail deposits (1.5% cost)

• Base FTP: 1.5%
• 5-year term premium: 1.0%
• Total FTP: 2.5%

Same mortgage funded by wholesale (4.5% cost):

• Base FTP: 4.5%
• 5-year term premium: 1.0%
• Total FTP: 5.5%

The mortgage business now has two different FTP rates depending on funding source.

The Funding Source Assignment Problem

Matched maturity requires answering: "Which deposits fund which assets?"

This is not straightforward. A bank doesn't label each deposit "this funds a mortgage" and each mortgage "this is funded by a deposit."

The solution is allocation formulas:

Assumption: Deposits fund assets in proportion to their availability

If the bank has:

• 30% core deposits


• 50% sticky deposits


• 20% hot deposits

Each mortgage is considered 30% core-funded, 50% sticky-funded, 20% hot-funded.

Weighted average FTP: 30% (0% FTP) + 50% (1.5% FTP) + 20% * (2.5% FTP) = 1.35% FTP

But this assumes deposits are distributed proportionally across all assets, which isn't realistic. Mortgages are actually funded by different deposits than overnight assets.

Better approach: Use behavioral assumptions

• Core deposits (stable, low-rate-sensitive) fund long-duration assets (mortgages, loans)


• Hot deposits (rate-sensitive) fund short-duration assets or wholesale-funded positions


• Wholesale funding funds strategic initiatives or high-return assets

Using behavioral assumptions:

• 70% core deposits fund mortgages


• 30% sticky deposits fund mortgages


• 0% hot deposits (too expensive for mortgages)

Weighted FTP for mortgages: 70% 0% + 30% 1.5% = 0.45% overnight plus term premium.

Advantages and Disadvantages of Each

Single Pool Advantages:
1. Transparent: All business lines use same FTP
2. Objective: Based on blended actual cost
3. Simple: Easy to calculate and explain
4. Fair: No business line subsidizes another

Single Pool Disadvantages:
1. Doesn't recognize deposit value: Doesn't reward gathering low-cost deposits
2. Perverse incentives: Can encourage wholesale funding over deposit gathering
3. Masks funding risk: Wholesale-funded assets don't "look expensive" in FTP
4. Less strategic: Can't use FTP to drive balance sheet strategy

Matched Maturity Advantages:
1. Recognizes deposit value: Deposit business gets credit for low-cost funding
2. Drives deposit strategy: Incentivizes deposit gathering and retention
3. Reflects reality: Mortgages ARE funded by deposits, not wholesale
4. Better capital allocation: High-return assets matched to low-cost funds

Matched Maturity Disadvantages:
1. Complex: Requires assumptions about funding source allocation
2. Non-transparent: Different business lines have different FTP rates
3. Subjective: Assumptions about deposit behavior can be wrong
4. Data intensive: Requires detailed tracking of funding sources

Real-World Hybrid Approaches

Most sophisticated banks use a hybrid:

1. Single pool for base rate (market-based SOFR + spreads)
2. Matched maturity for deposit premiums

Example:

• Market-based 5-year FTP: 4.5% (from SOFR swaps + bank credit spread)


• Additional deposit FTP credit: 0.8% (for retail deposits based on actual cost)


• Mortgage funded by retail deposits: FTP charge of 4.5% - 0.8% = 3.7%

This captures benefits of both approaches: market objectivity plus deposit incentives.

The Forward-Looking Perspective

FTP methodology choice affects how the bank responds to market changes.

Single pool in rising rate environment:

• All FTP rates rise uniformly


• All business lines see similar profitability compression


• No incentive for deposit-gathering (deposits get credited at higher rates, costing more)

Matched maturity in rising rate environment:

• Deposit FTP rates rise (reflecting higher deposit costs)


• But deposit gathering remains profitable if customer rate increases lag FTP increases


• Wholesale-funded assets become less attractive (FTP rates rise more)


• Incentivizes rebalancing to more deposit funding

Matched maturity creates more dynamic balance sheet management. Single pool is static.

For ALM managers, the choice of FTP methodology is as important as the actual FTP rates. It's your primary tool for shaping how the organization thinks about funding and capital allocation.