Estimating the Funding Benefit of Equity in Loan Profitability Models

Summary

The document addresses how a credit union might estimate the funding benefit of equity in a funds transfer pricing or risk-adjusted profitability model. The proposed calculation multiplies the target capital ratio by the loan’s risk weight and by the cost of funds. This expresses the benefit as a percentage of the loan balance, based on the capital allocation associated with that risk-weighted exposure and the institution’s funding cost.

The answer provides a brief numerical illustration, yielding a benefit of 38 basis points from its stated assumptions. It frames the calculation as essentially a weighted cost of capital concept, but offers no source for the example value raised in the question and no discussion of regulatory capital definitions, the appropriate funding benchmark, or institution-specific policy. The result should therefore be treated as a simplified modeling rule rather than a universally prescribed FTP method.

Key ideas

• Estimate the equity funding benefit by multiplying the capital ratio, risk weight, and cost of funds.
• Risk weight adjusts the capital allocation associated with a loan exposure.
• The output is expressed as a funding benefit percentage or basis-point adjustment.
• The proposed rule is simplified and does not establish a universal FTP convention.

Tags

# How to calculate the Funding Benefit of Equity for a profitability or FTP calculator for a credit union


# How to calculate the Funding Benefit of Equity for a profitability or FTP calculator for a credit union












I am creating a RAROC/FTP model for different loan types on a credit union balance sheet. I am stuck on how to calculate the funding benefit of equity that would be netted out of my cost of funds benchmark. An example below shows the funding benefit @ 0.17%. Does anyone know where that may be sourced from or what calc method is being used to arrive at that result?

## Answer by John (score 1)

https://quant.stackexchange.com/a/76766

You're essentially calculating the Weighted Average Cost of Capital.

Target Capital Ratio * Risk Weight * Cost of Funds = Funding Benefit of equity %

Ex: Risk weight = 75% Capital Ratio = 10% Cost of Funds = 5%

Funding Benefit of Equity = 38bps

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