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: Single Pool vs. Matched Maturity

The Two Fundamental Approaches: Overview

Banks implement FTP in two primary ways: single pool and matched maturity. Each approach makes fundamentally different assumptions about how funding works and therefore produces different FTP rates and incentive structures. The choice of methodology has profound implications for how the organization thinks about deposits, wholesale funding, and balance sheet strategy.

Single pool treats all funding sources (deposits, wholesale debt, equity) as fungible. Every dollar of funding is identical and costs the same, regardless of source. This is simpler but less realistic.

Matched maturity recognizes that different funding sources have different costs and characteristics. Deposits fund some assets, wholesale funds others. This is more complex but economically realistic.

Most banks choose one approach and live with it for years or decades, so understanding the tradeoffs is critical.

Single Pool Methodology: Step-by-Step Implementation

Step 1: Aggregate all funding

The treasury department gathers comprehensive data on all sources of funds:

• Demand deposits (non-interest-bearing checking): $80B


• Savings deposits (interest-bearing): $60B


• Money market deposits: $35B


• Certificates of deposit: $25B


• Wholesale borrowings (repo, commercial paper, senior debt): $30B


• Subordinated debt: $5B


• Equity: $15B


• Total funding: $250B

Each source has:

• Current balance


• Current rate paid (or cost)


• Expected maturity


• Repricing frequency

Step 2: Calculate marginal cost of funds

Marginal cost is the cost to raise one additional dollar of funding. This is critical because it reflects what the bank actually pays at the margin, not the average.

If the bank needs to raise $100M more funding today:

• First $60M might come from deposits (can gather at 1.5% cost)


• Next $40M might come from wholesale markets (cost 4.5% for a 1-year borrowing)


• Marginal cost = (60% 1.5%) + (40% 4.5%) = 2.7%

This 2.7% is saying: the next dollar the bank raises will cost 2.7% on average.

Step 3: Build term structure from marginal cost

Now create FTP rates for different tenors. The marginal cost (2.7%) is the base for overnight funding. For longer tenors, add a term premium reflecting the cost of longer-term funding:

• 1-month FTP: 2.7% + 0% term premium = 2.7%
• 3-month FTP: 2.7% + 10bps = 2.8%
• 6-month FTP: 2.7% + 25bps = 2.95%
• 1-year FTP: 2.7% + 50bps = 3.2%
• 5-year FTP: 2.7% + 100bps = 3.7%
• 10-year FTP: 2.7% + 150bps = 4.2%

The term premium reflects the incremental cost to lock in funding for longer periods. For the bank to fund a 5-year asset, it must commit funding for 5 years, which is riskier and more expensive than overnight funding.

Step 4: Apply uniformly to all assets and liabilities

Under single pool, every mortgage originated gets charged FTP at 3.7% (for a 5-year mortgage). Every retail deposit is credited FTP at 3.7% (if matched to 5-year tenor). Every commercial loan is charged FTP at its appropriate tenor.

The critical feature: every business line faces the same FTP curve. No differentiation by funding source.

Matched Maturity Methodology: Realistic but Complex

Matched maturity starts with a different premise: deposits actually DO fund certain assets, and wholesale funding funds others. This approach tries to reflect that economic reality.

Step 1: Categorize funding sources

Instead of treating all funding alike, characterize deposits by their behavior:

• Core deposits (stable, low-rate-sensitive): DIBs (non-interest-bearing demand deposits), payroll accounts, government accounts. These deposits don’t leave when rates rise. Cost: 0% (or sometimes the cost to maintain the relationship, 10-20bps). Behavior: Relatively sticky

• Sticky deposits (somewhat price-sensitive): Regular interest-bearing savings accounts, some money market deposits. These deposits leave if competitors offer significantly better rates, but they don’t flee for 25bps. Cost: 1.5%. Behavior: Moderately sticky

• Hot deposits (very price-sensitive): Rate-shopper CDs, sweep accounts, money market funds. These deposits chase yield. A 50bp rate advantage to a competitor causes massive flows. Cost: 2.5%. Behavior: Volatile

• Wholesale funding (no stickiness): Market-priced repo, commercial paper, senior debt, subordinated debt. Cost: 4.5% (market-priced). Behavior: Rate-determined, no relationship component

Step 2: Assign funding sources to liabilities/assets

Here’s where matched maturity gets complex. The bank doesn’t literally label deposits “this funds a mortgage.” Instead, it makes behavioral assumptions:

• Core deposits (0% cost): Fund the volatile/unpredictable portion of the balance sheet (short-duration assets, retail positions)
• Sticky deposits (1.5% cost): Fund retail mortgages and consumer loans (these are stable products that hold balances)
• Hot deposits (2.5% cost): Fund competitive retail products where deposits are rate-elastic
• Wholesale (4.5% cost): Fund long-duration assets, strategic initiatives, and any funding shortfall

The assumption is that core deposits, being stable, are best used to fund volatile assets. Wholesale, being expensive, should fund only what deposits can’t cover.

Step 3: Create funding source-specific FTP rates

Each funding source gets its own FTP rate:

For assets funded by core deposits (0% cost):

• Base rate: 0%


• 5-year term premium: 1.2% (cost of extending 5-year maturity)


• Total FTP: 1.2%

For assets funded by sticky deposits (1.5% cost):

• Base rate: 1.5%


• 5-year term premium: 1.2%


• Total FTP: 2.7%

For assets funded by hot deposits (2.5% cost):

• Base rate: 2.5%


• 5-year term premium: 1.2%


• Total FTP: 3.7%

For assets funded by wholesale (4.5% cost):

• Base rate: 4.5%


• 5-year term premium: 1.2%


• Total FTP: 5.7%

Critical insight: A 5-year mortgage funded by core deposits faces FTP of 2.7%. The same 5-year mortgage funded by wholesale faces FTP of 5.7%. The cost difference is 300bps—huge.

Step 4: The funding assignment problem

Here’s where matched maturity requires judgment. The bank doesn’t have perfect information about which deposits fund which assets. So it must make allocation assumptions.

Assumption 1: Proportional allocation

If the bank’s funding mix is:

• 30% core deposits


• 50% sticky deposits


• 20% wholesale

Then each mortgage is allocated:

• 30% as core-funded at 1.2% FTP


• 50% as sticky-funded at 2.7% FTP


• 20% as wholesale-funded at 5.7% FTP


• Weighted average FTP: (30% 1.2%) + (50% 2.7%) + (20% * 5.7%) = 3.06%

But this assumes deposits are distributed across all assets proportionally, which is unrealistic.

Assumption 2: Behavioral allocation (More realistic)

Core deposits (stable) actually fund long-duration assets (mortgages, long-term loans). Hot deposits (volatile) fund short-duration assets or are wholesale-equivalent.

Using behavioral assumptions:

• Mortgages: 70% core-funded, 30% sticky-funded, 0% wholesale-funded


• Commercial loans: 40% core, 40% sticky, 20% wholesale


• Short-term assets (overnight investments): 0% core, 0% sticky, 100% wholesale

For a 5-year mortgage under behavioral allocation:

• FTP = (70% 1.2%) + (30% 2.7%) = 0.84% + 0.81% = 1.65% + 5-year term premium


• With 5-year term premium (1.2%): Total FTP = 2.85%

This is more conservative than proportional allocation (2.85% vs. 3.06%) because it reflects that mortgages are disproportionately funded by low-cost core deposits.

Advantages and Disadvantages: Choosing an Approach

Single Pool Advantages:

1. Transparent: All business lines use the same FTP curve. No favoritism or subjective allocations
2. Objective: Derived from market rates. Hard to argue with. Less political
3. Simple: Easy to calculate and update. Transparent formula
4. Fair: No business line subsidizes another via allocation assumptions
5. Auditable: Easy for internal and external auditors to review

Single Pool Disadvantages:

1. Doesn’t recognize deposit value: Doesn’t reward the bank for gathering low-cost deposits. Core deposits get credited at market rate (2.7%), not at their actual cost (near 0%)
2. Perverse incentives: Can actually incentivize wholesale funding over deposit gathering because both face the same FTP. If a business line can’t grow deposits, it switches to wholesale (same FTP either way)
3. Masks funding risk: A business line funded by wholesale looks equally profitable as one funded by deposits (same FTP), even though wholesale is riskier
4. Less strategic: Can’t use FTP to drive desired behavior. FTP is mechanical, not strategic
5. Doesn’t optimize funding: Provides no incentive to optimize the funding mix between deposits and wholesale

Matched Maturity Advantages:

1. Recognizes deposit value: Core deposits get credited at their actual cost (near 0%), not market rate. Retail banking is rewarded for gathering low-cost funding
2. Drives deposit strategy: Incentivizes aggressive deposit gathering because it’s highly profitable. Deposit profitability is explicit
3. Reflects reality: Mortgages ARE actually funded by deposits (core balances are stable). Matched maturity reflects this
4. Better capital allocation: High-return assets matched to low-cost funds creates optimal economics
5. Strategic tool: Can use FTP to actively manage balance sheet (e.g., raise deposit FTP to incentivize gathering)

Matched Maturity Disadvantages:

1. Complex: Requires multiple FTP curves and funding allocation assumptions
2. Non-transparent: Different business lines get different FTP rates. Harder to explain, more political
3. Subjective: Assumptions about core vs. hot deposits, allocation percentages—all subject to judgment and gaming
4. Data intensive: Requires detailed behavioral analysis of deposits, regular testing
5. Can be gamed: Business lines may argue for better FTP allocations. Treasury has to defend subjective choices

Real-World Hybrid Approaches

Most sophisticated banks don’t use pure single pool or pure matched maturity. Instead, they use a hybrid:

Hybrid Approach Example:

1. Market-based FTP for the base rate (single pool logic):
- 5-year SOFR swap: 4.5%
- Bank credit spread: 40bps
- Market-based 5-year FTP: 4.9%

2. Matched maturity adjustment for deposits (recognize actual funding costs):
- Core deposit actual cost: Near 0%
- Core deposit FTP adjustment: Subtract 80bps from market FTP
- Adjusted 5-year FTP for core-funded mortgages: 4.9% - 0.8% = 4.1%

3. Wholesale without adjustment:
- Wholesale-funded assets face full market FTP: 4.9%

This hybrid captures benefits of both approaches:

• Market objectivity (uses SOFR swaps, bank credit spreads—observable)


• Deposit incentive (core deposits get explicit credit, making deposit gathering profitable)


• Simplicity (only one adjustment, not multiple FTP curves)

FTP Methodology and Strategic Behavior in Different Rate Environments

The choice of FTP methodology affects how the bank behaves when rates change. This is where strategy reveals itself:

Single Pool in a Rising-Rate Environment:

• All FTP rates rise uniformly (because they’re tied to market rates)
• All business lines see similar profitability compression (higher FTP charges)
• Retail deposits face higher FTP credits (now cost more to fund wholesale alternatives)
• But deposit gathering doesn’t become MORE attractive; deposits just face the same FTP
• Strategic implication: Single pool provides no special incentive to shift funding sources

Matched Maturity in a Rising-Rate Environment:

• Market FTP rates rise (tied to market rates)
• Deposit FTP adjustments stay constant (based on actual deposit costs, which haven’t changed much)
• Wholesale-funded assets become less attractive (higher FTP charges)
• Deposit-funded assets maintain their attractiveness
• Strategic implication: Rising rates incentivize rebalancing to more deposit funding

Concrete example: Rates rise 100bps

Under single pool:

• Mortgage FTP rises from 4.9% to 5.9%


• Deposit FTP credit rises from 4.9% to 5.9%


• Net margin on deposits: Unchanged


• Incentive to gather deposits: None increased

Under matched maturity:

• Market FTP rises from 4.9% to 5.9%


• But core deposit adjustment stays: Subtract 80bps


• Mortgage funded by core deposits: FTP rises from 4.1% to 5.1% (only 100bps, matching rate rise)


• Deposit FTP credit rises from 4.9% to 5.9% (100bps rise)


• Net margin on core-funded mortgages stays constant (spread doesn’t compress)


• But deposits become even more attractive relative to wholesale


• Incentive to gather deposits: Sharply increased

Matched maturity creates more dynamic balance sheet management.

The Forward-Looking Perspective: Which Approach Is Future-Proof?

In a stable, neutral rate environment, either approach works. But looking forward, consider:

If rates are expected to remain volatile (as many predict), matched maturity provides better incentives for deposit stability. Banks using matched maturity will structure deposits to be more stable (better core deposit retention programs).

If rates are expected to rise significantly, matched maturity banks will be better positioned because they’ve been incentivized to build core deposit bases during calm periods.

If technology disrupts traditional deposit gathering (as fintech competitors grow), matched maturity banks have already been incentivized to think about deposit value strategically, while single pool banks have been neutral on the topic.

For practitioners, the lesson is: The choice of FTP methodology isn’t just accounting. It shapes how the organization thinks about funding, deposits, and balance sheet strategy for years to come. Choose wisely.