Transfer Pricing System in Banks

Abstract

n today's environment of banking services industry, where competition is emerging every day, where the customer’s requirements are becoming sophisticated and the number and diversity of products and geographic markets is growing, maintaining margins is becoming more and more difficult. Developing a successful activity, profitable and sustainable has become one of the key factors to survive. Consequently, performance measurement systems take a special significance as the most important techniques in decision making processes. Currently, commercial banks operating in the Albanian banking market does not follow a specific model/method for assessing profitability and performance for each organizational unit. Generally banks, in the process of measuring their performance, are guided by budgeting process detailed of each unit within the bank and fulfillment of the objectives set. But, these objectives refer only to level of sales (eg., collected deposits or loans granted) for each unit/branch and don’t distribute costs generated by each cost centers. Funds transfer pricing is a technique suggested to assist banks in measuring profitability. This technique allows managers to compare the profitability of different products, different branches and management and economic performance of the various units. This paper discusses the key principles of functioning of a transfer pricing system, and actually it as a useful method to be used in measuring the performance of various units within a bank. First, the paper briefly addressed the cost of funds for banks, as a starting point for setting the transfer price. Then it treats methodologies for determining the transfer price. Finally, at the end it addressed the application of the system of internal transfer price in a hypothetical example which derives into specific conclusions.

DOI: 10.5901/ajis.2015.v4n3s1p509