Westpac Group Pillar 3 Report March 2013 - Iguana IR Sites

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PILLAR 3 REPORT INTEREST RATE RISK IN THE BANKING BOOK (IRRBB) Interest Rate Risk in the Banking Book (IRRBB) is the risk to interest income arising from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities. Approach The banking book activities that give rise to market risk include lending activities, balance sheet funding and capital management. Interest rate risk, currency risk and funding and liquidity risk are inherent in these activities. Group Treasury’s Asset & Liability Management (ALM) unit is responsible for managing market risk arising from Westpac’s banking book activity. All material regions, business lines and legal entities are included in Westpac’s IRRBB framework. Asset and liability management ALM manages the structural interest rate mismatch associated with the transfer priced balance sheet, including the investment of Westpac’s capital to its agreed benchmark duration. A key risk management objective is to achieve reasonable stability of Net Interest Income (NII) over time. These activities are performed under the oversight of MARCO and the Financial Markets & Treasury Risk (FMTR) unit. Net Interest Income sensitivity NII sensitivity is managed in terms of the net interest income-at-risk (NaR) modelled over a three year time horizon to a 99% confidence interval for movements in wholesale market interest rates. A simulation model is used to calculate Westpac’s potential NaR. The NII simulation framework combines the underlying statement of financial position data with assumptions about runoff and new business, expected repricing behaviour and changes in wholesale market interest rates. Simulations using a range of interest rate scenarios are used to provide a series of potential future NII outcomes. The interest rate scenarios modelled include those projected using historical market interest rate volatility as well as 100 and 200 basis point shifts up and down from current market yield curves. Additional stressed interest rate scenarios are also considered and modelled. A comparison between the NII outcomes from these modelled scenarios indicates the sensitivity to interest rate changes. On and off-balance sheet instruments are then used to manage this interest rate risk. NaR limit The BRMC has approved a NaR limit. This limit is managed by the Treasurer and is expressed as a deviation from benchmark hedge levels over a one-year rolling time frame, to a 99% level of confidence. This limit is monitored by FMTR. VaR limit The BRMC has also approved a VaR limit for ALM activities. This limit is managed by the Treasurer and monitored by FMTR. Additionally, FMTR sets structural risk limits to prevent undue concentration of risk. Structural foreign exchange rate risk Structural foreign exchange rate risk results from the generation of foreign currency denominated earnings and from Westpac's capital deployed in offshore branches and subsidiaries, where it is denominated in currencies other than Australian dollars. The Australian dollar equivalent of offshore earnings and capital is subject to change as exchange rates fluctuate, which could introduce significant variability to Westpac's reported financial results. ALCO provides oversight of the appropriateness of foreign exchange hedges on earnings. Risk reporting Interest rate risk in the banking book risk measurement systems and personnel are located in Sydney, Auckland, Singapore and Shanghai. These include front office product systems, which capture all treasury funding and derivative transactions; the transfer pricing system, which captures all retail and other business transactions; nontraded VaR systems, which calculate Group Treasury VaR; and, the NII system, which calculates NaR. Daily monitoring of current exposure and limit utilisation is conducted independently by FMTR, which monitors market risk exposures against VaR, NaR and structural risk limits. Management reports detailing structural positions and VaR are produced and distributed daily for use by dealers and management across all stakeholder groups. Monthly and quarterly reports are produced for the senior management market risk forums of MARCO and BRMC respectively to provide transparency of material market risks and issues. 74
PILLAR 3 REPORT INTEREST RATE RISK IN THE BANKING BOOK (IRRBB) Risk mitigation Market risk arising in the banking book stems from the ordinary course of banking activities, including structural interest rate risk (the mismatch between the duration of assets and liabilities) and capital management. Hedging Westpac’s exposure to interest rate risk is undertaken using derivatives. The hedge accounting strategy adopted utilises a combination of the cash flow, fair value and net investment hedge approaches. Some derivatives held for economic hedging purposes do not meet the criteria for hedge accounting as defined under AASB 139 and therefore are accounted for in the same way as derivatives held for trading. The same controls used to monitor traded market risk allow for continuous monitoring by management. Change in economic value of a sudden upward and downward movement in interest rates 31 March 2013 200bp parallel 200bp parallel $m increase decrease AUD 124.8 (123.6) NZD 17.9 (18.0) USD - - Total 142.7 (141.6) 30 September 2012 200bp parallel 200bp parallel $m increase decrease AUD 189.0 (192.4) NZD 12.7 (13.2) USD - - Total 201.7 (205.6) 31 March 2012 200bp parallel 200bp parallel $m increase decrease AUD 167.3 (168.8) NZD 27.2 (27.7) USD - - Total 194.5 (196.5) VaR results for non-traded interest rate risk For the For the For the 6 months ended 6 months ended 6 months ended 31 March 30 September 31 March $m 2013 2012 2012 High 21.0 15.7 11.7 Low 7.4 3.9 2.4 Average 13.8 9.4 7.4 Period end 7.4 9.4 9.6 Interest rate risk in the banking book regulatory capital and risk weighted assets 31 March 30 September 31 March $m 2013 2012 2012 Total Capital Required 1,100 819 1,057 Risk Weighted Assets 13,744 10,234 13,208 75
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WESTPAC GROUP PILLAR 3 REPORT MARCH
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PILLAR 3 REPORT EXECUTIVE SUMMARY B
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PILLAR 3 REPORT INTRODUCTION Westpa
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PILLAR 3 REPORT CONTROLLING AND MAN
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PILLAR 3 REPORT GROUP STRUCTURE Wes
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PILLAR 3 REPORT CAPITAL OVERVIEW Ca
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PILLAR 3 REPORT CAPITAL OVERVIEW 12
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PILLAR 3 REPORT CREDIT RISK MANAGEM
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PILLAR 3 REPORT CREDIT RISK MANAGEM
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Page 57 and 58: PILLAR 3 REPORT SECURITISATION Cons
Page 59 and 60: PILLAR 3 REPORT SECURITISATION Bank
Page 61 and 62: PILLAR 3 REPORT SECURITISATION Bank
Page 63 and 64: PILLAR 3 REPORT SECURITISATION Trad
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Page 67 and 68: PILLAR 3 REPORT MARKET RISK Risk mi
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Page 77 and 78: PILLAR 3 REPORT APPENDIX I - APS330
Page 79 and 80: PILLAR 3 REPORT APPENDIX II - REGUL
Page 81 and 82: PILLAR 3 REPORT APPENDIX III - CAPI
Page 87 and 88: PILLAR 3 REPORT APPENDIX IV - REGUL
Page 89 and 90: PILLAR 3 REPORT APPENDIX IV - REGUL
Page 91 and 92: PILLAR 3 REPORT GLOSSARY Term Actua
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Westpac Group Pillar 3 Report March 2013 - Iguana IR Sites

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