Transfer Pricing for Financial Institutions

Description

Establishing and maintaining effective transfer pricing policies is a key challenge in today's increasingly competitive international financial services sector. There are numerous issues involved, from the requirements of shareholders and risk management to the allocation of capital. There are also many different techniques for establishing efficient transfer pricing systems within an organisation. This illuminating handbook provides a thorough introduction to transfer pricing and its uses within financial organisations, as well as a clear analysis of all the issues involved. Transfer pricing is so complex and variable that there can be no definitive blueprint for success: however, in this book John Smullen has provided a vital contribution to the debate and a much-needed clarification of this important topic. Some of the areas covered:

What transfer pricing is and why it is used
Why transfer prices are so appropriate for financial institutions
Why each organisation needs to approach the introduction of transfer prices differently
How transfer pricing works in commercial organisations
The different types of transfer price
Specific analysis of the transfer pricing of funds, capital and derivatives
How to evaluate risk adjusted performance measures
The complexities of estimating marginal costs and revenues
A framework for understanding the motivation of shareholders, managers and regulators
How transfer pricing works as part of management information strategy

This lucid and authoritative handbook will help you to:

Understand the different techniques used in transfer pricing
Establish transfer prices in line with your organisation's strategy and objectives
Make sound decisions, minimise risk and achieve better outcomes

This is a book for people involved in raising and loaning funds in today's global markets who wants to understand the issues involved in transfer pricing and the techniques required. It will be used by banking, investment, insurance and other financial organisations worldwide.

An authoritative and detailed survey of transfer pricing in the financial sector
A clear exploration by an expert in the field
A full description of the issues involved and the techniques required

Front Cover 2
Transfer Pricing for Financial Institutions 5
Copyright Page 6
Dedication 7
Table of Contents 9
Preface 13
PART 1: AN INTRODUCTION TO TRANSFER PRICING IN FINANCIAL INSTITITHONS 15
- Chapter 1. What is transfer pricing? 17
  - The definition of transfer pricing 17
  - Introduction 17
  - Motives for transfer pricing 18
  - The focus of the book 21
- Chapter 2. The general theory of transfer pricing 22
  - The economist's perception of optimal transfer prices 22
  - Introduction 22

Front Cover 2
Transfer Pricing for Financial Institutions 5
Copyright Page 6
Dedication 7
Table of Contents 9
Preface 13
PART 1: AN INTRODUCTION TO TRANSFER PRICING IN FINANCIAL INSTITITHONS 15
- Chapter 1. What is transfer pricing? 17
  - The definition of transfer pricing 17
  - Introduction 17
  - Motives for transfer pricing 18
  - The focus of the book 21
- Chapter 2. The general theory of transfer pricing 22
  - The economist's perception of optimal transfer prices 22
  - Introduction 22
  - Comments on the simple optimal pricing model 27
  - Transfer pricing: the accountant's perspective 29
  - Conclusions 31
- Chapter 3. Transfer pricing in commercial organisations 32
  - Introduction 32
  - Comments on transfer pricing experience 33
  - Single country transfer pricing systems 33
  - Multinational transfer pricing practices 33
- Chapter 4. The uses of transfer pricing in financial organisations 35
  - The nature of transfer prices 35
  - Introduction 35
  - Uses of transfer pricing 36
  - Different types of transfer price 44
  - Conclusions 46
- PART 2: SETTING TRANSFER PRICES IN FINANCIAL INSTITUTIONS 47
  - Chapter 5. Integrating transfer prices with organisational structure 49
    - Introduction 49
    - Financial information: the strategic perspective 49
    - The interrelationships of units 51
    - Conclusions 53
  - Chapter 6. Attitudes to risk 54
    - Introduction 54
    - The traditional view of risk 54
    - Market-based attitudes to risk 57
    - Conclusions 62
  - PART 3: SPECIFIC TRANSFER PRICES 65
    - Chapter 7. Transfer prices based on operating expenses 67
      - The principles of activity-based costing 67
      - Introduction 67
      - The distinction between transfer pricing and cost allocation 70
      - Problems in using activity-based costing information as part of a transfer pricing system 70
      - The uses of cost-based information for transfer pricing 71
      - Conclusions on the use of costing information 72
      - Comparing financial and non-financial organisations 72
    - Chapter 8. Transfer pricing the cost of funds: a general perspective 73
      - Borrowing and lending, investing and funding 73
      - Introduction 73
      - Transfer pricing and time 77
      - Comments on transfer pricing 78
      - Conclusions 79
    - Chapter 9. The transfer price of funds: some perspectives on wholesale and retail funding 80
      - To what extent are wholesale and retail funding equivalent? 80
      - Introduction 80
      - Price making 81
      - Effective duration of funds 82
      - Differences between wholesale and retail customers 83
      - Discontinuities in wholesale funding 83
      - Conclusions 84
    - Chapter 10. The transfer pricing of capital 85
      - Introduction 85
      - Capital as funding 86
      - Regulatory capital 88
      - Capital at risk 91
      - Conclusions 92
    - Chapter 11. Risk adjusted performance measures: the transfer price of investment portfolios 93
      - Introduction 93
      - General issues in relation to RAPMs 95
      - The measures 96
      - Problems with the measures 102
      - Conclusions 103
    - Chapter 12. Risk adjusted performance measures: return on risk adjusted capital and associated measures 104
      - Introduction 104
      - RORAC 104
      - Evaluation of RORAC style measures 106
      - Is the RORAC approach totally misplaced? 110
      - Conclusions 110
    - Chapter 13. Risk adjusted performance measures: a critical overview 111
      - RAPMs and investors' desires 111
      - Introduction 111
      - RAPMs as statistics 114
      - RAPMs and incrementality 115
      - Conclusions 116
    - Chapter 14. The transfer pricing of derivatives 117
      - Introduction 117
      - The pricing of financial options 118
      - Business options 120
      - Conclusions 121
    - PART 4: THE STRATEGIC PERSPECTIVE 123
      - Chapter 15. Optimal bank modelling for transfer pricing 125
        
        Introduction 125
        
        Overview of programming model 125
        
        The programming problem applied to a bank situation 127
        
        Interpreting the solution 129
        
        The relationship of the model and transfer prices 130
        
        The impact of constraints 131
        
        The risk relationship of these types of model 132
        
        Conclusions 132
      - Chapter 16. Transfer pricing and management information strategy 133
        
        Introduction 133
        
        The financial and non-financial perspectives 133
        
        Distribution channels 134
        
        Customers 137
        
        Conclusions 139
      - PART 5: A REVIEW OF KEY ISSUES AND CONCLUSIONS 141
        
        17. Issues and conclusions 143
        
        Introduction 143
        
        No single transfer price 143
        
        Transfer pricing systems are appropriate for financial institutions 143
        
        Market-based prices and market power 144
        
        Motivation 145
        
        Matching 145
        
        Are transfer pricing systems excessively risk averse? 146
        
        Conclusions 147
        
        Relating transfer pricing to strategy 147
        
        Bibliography 148
        
        Index 159

Author's affiliation

John Smullen: Senior Academic Associate, University of Gree

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Author's affiliation