PILLAR III DISCLOSURES - BASEL II 4. MARKET RISK (continued) Interest Rate Risk (non-trading) Interest rate risk is the risk that the earnings or capital of the Group, or its ability to meet business objectives, will be adversely affected by movements in interest rates. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. Changes in interest rates can affect a bank’s earnings by changing its net interest income and the level of other interest sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the Group’s assets, liabilities and off-balance sheet instruments because the present value of future cash flows and / or the cash flows themselves change when interest rates change. The Bank employs a risk management process that maintains interest rate risk within prudent levels. The Board recognises that it has responsibility for understanding the nature and the level of interest rate risk taken by the Bank, and has defined a risk framework pertaining to the management of non trading Interest Rate Risk and has identified lines of authority and responsibility for managing interest rate risk exposures. 132 ANNUAL REPORT 2008 The Board has delegated the responsibility for the management of interest rate risk to the Group Asset and Liability Committee (GALCO). GALCO is responsible for setting and monitoring the interest rate risk strategy of the Group, for the implementation of the Interest Rate Risk framework and ensuring that the management process is in place to maintain interest rate risk within prudent levels. GALCO reviews the Interest Rate Risk framework annually and submits recommendations for changes to the Executive Committee and Board as applicable. The responsibility for the implementation of the Bank’s interest rate risk policies resides with the Group Treasurer. An independent review of all interest exposure present in the Banking Book is undertaken by the Group Market Risk team and communicated to GALCO on a monthly basis. Interest rate re-pricing reports are based on each product’s contractual re-pricing characteristics overlaid where appropriate by behavioural adjustments. Behavioural adjustments are derived by an analysis of customer behaviour over time augmented by input from the business units. Reports detailing the interest rate risk exposure of the Bank are reviewed by GALCO and the Board on a regular basis. The following table summarises the repricing profiles of the Group’s assets and liabilities as at 31 December 2008.
PILLAR III DISCLOSURES - BASEL II 4. MARKET RISK (continued) TABLE - 17 INTEREST RATE RISK Less than three months Three months to one year Over one year Total US$ ’000 US$ ’000 US$ ’000 US$ ’000 ASSETS Treasury bills and bonds 393,773 710,071 133,153 1,236,997 Deposits with banks and other financial institutions 2,503,868 198,065 18,470 2,720,403 Loans and advances 7,834,701 1,365,880 4,217,997 13,418,578 Non-trading investments 630,702 406,817 2,046,682 3,084,201 11,363,044 2,680,833 6,416,302 20,460,179 LIABILITIES Deposits from banks and other financial institutions 4,356,310 641,178 123,524 5,121,012 Customers' deposits 9,867,819 2,394,309 439,174 12,701,302 Term debt 1,200,000 150,000 - 1,350,000 Subordinated liabilities 119,445 279,131 225,000 623,576 15,543,574 3,464,618 787,698 19,795,890 On - balance sheet gap (4,180,530) (783,785) 5,628,604 Off - balance sheet gap 748,101 624,908 (1,373,009) Total interest sensitivity gap (3,432,429) (158,877) 4,255,595 Cumulative interest sensitivity gap (3,432,429) (3,591,306) 664,289 Interest rate risk sensitivity analysis The Group’s interest rate risk sensitivity is analysed in note 34b to the consolidated financial statements of the Group for the year ended 31 December 2008. 133 ANNUAL REPORT 2008 Equity Risk Equity risk is the risk of changes in the fair value of an equity instrument. AUB Group is exposed to equity risk on non-trading equity positions that are primarily focused on the GCC stock markets. The Board has set limits on the amount and type of investments that may be made by the Bank. This is monitored on an ongoing basis by the Group Investment Committee with pre approved loss thresholds A process of effective and prudent risk management is facilitated through the strategies used along with several key independent functions. These functions include Risk & Credit Control Unit, Market Risk, Operational Risk, Financial Control and Internal Audit. The effective management of risk is ensured by identifying, measuring and monitoring risks from a variety of perspectives.