FirstCaribbean International Bank Limited

Notes To The Consolidated Financial Statements
simulate an impact on earnings of extreme
market events up to a period of one quarter.
Scenarios are developed using actual historical
data during periods of market disruption, or are
based upon hypothetical occurrence of economic
or political events or natural disasters and are
designed by CIBC’s economists, business leaders
and risk managers.
• The local currency stress tests are designed on a
similar but smaller scale. For interest rate stresses,
Market Risk in conjunction with Treasury consider
the market data over approximately the last 10
years and identify the greatest curve or data point
moves over both sixty and single days. These are
then applied to the existing positions/sensitivities
of the bank. This is performed and reported on
a monthly basis as they do not tend to change
rapidly. For foreign exchange stresses, the Group
considers what the effect of a currency coming off
a peg would have on the earnings of the Group.
This is largely judgmental, as it has happened so
infrequently in the region and it is supplemented
by some historical reviews both within the region
and in other areas where pegged currency regimes
have or do exist.
Interest rate risk
Non-trading interest rate risk consists primarily of a
combination of the risks inherent in asset and liability
management activities and the activities of the core
retail, wealth and corporate businesses. Interest rate risk
results from differences in the maturities or re-pricing
dates of assets inclusive of those assets not recognised in
the statement of financial position.
Summary of Key Market Risks
From the multitude of market risks arising from the various
currencies, yield curves and spreads throughout the
regional and broader international markets, the following
risks are considered by management the most significant
for the Group. The risk of credit spreads widening in a
similar fashion to the Credit Crisis of 2008 on bonds held
within the investment portfolios, and the magnitude of
the risk, but low probability of a peg breaking between the
USD and a local currency, particularly the BSD, impacting
the structural long position of the bank. The largest
interest rate risk is that of the USD yield curve continuing
to flatten, but due to the already historical lows across the
curve this again is considered a relatively low probability
for it to generate a material impact. The following section
highlights these key risks as well as some of the lesser ones
that arise from the Group’s ongoing banking operations.
The following table shows the key measures for market risk, namely the potential loss or Value at Risk (VaR) related to
interest rates, the results of interest rate stress tests over 1 day and 60 days and the potential impact of a 1 basis point
change or DV01:
Market risk metrics 2010 2009
Interest rate VaR – Hard currency $ 514 $ 1,776
Interest rate VaR – Local currency 301 183
Interest rate VaR – Total * 655 1,826
Interest rate stress – Hard currency 1 day 7,996 4,445
Interest rate stress – Hard currency 60 days 19,754 24,454
Interest rate stress – Local currency 1 day 5,700 5,370
Interest rate stress – Local currency 60 days 17,390 17,610
DV01 Hard currency (129) (147)
DV01 Local currency 59 83
* Interest rate VaR for hard currency and local currency are not additive since the underlying variables are not
perfectly correlated.
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