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Risk management continued
For the year ended 31 December 2013
All amounts are stated in £m unless otherwise indicated
3. Market risk continued
Net greater than 12 month gap position
31 December
2013
31 December
2012
At the period end (802) (928)
Average for the period (376) (612)
Maximum sensitivity for the period (802) (1,090)
Minimum sensitivity for the period (45) (248)
3.1.2 Treasury interest rate risk Audited
Treasury manage the Bank’s liquid asset portfolios and executes derivative instruments with the wholesale markets on behalf of the Bank and its customers.
Treasury operates a trading book, however currently there are no exposures as at the end of 2013 (2012: £nil).
The Bank assesses the interest rate risk arising within the liquid asset portfolios via key measures; Value at Risk and PV01, with associated delegated limits.
These are supplemented by additional controls such as maturity and stop loss limits.
3.1.2.1 Value at risk (VaR) Audited
VaR measures the daily maximum potential gain or loss due to market volatility within a statistical confidence level of 95% and a one-day holding period.
The VaR methodology employed is historical simulation using a time series of one year to latest day and was £0.4m at 31 December 2013 for the treasury
portfolios (2012: £0.4m).
A number of limitations should be considered in relation to the VaR model:
• historic data is not necessarily a reliable predictor of future events;
• the model, by definition, does not capture potential losses outside the 95% confidence level, particularly those events that are extreme in nature; and
• VaR is based on exposures at close of business and, therefore, does not necessarily reflect intra-day exposures.
The outputs from the VaR model were reviewed in 2013 to ensure that they were consistent with methodology employed. The Bank does not have PRA
VaR model permission and VaR is not used in regulatory reporting. The maturity method is used for reporting general interest rate risk for prudential
reporting purposes.
3.1.2.2 PV01 Audited
The Bank also employs PV01 which illustrates the change in valuation on a fixed income portfolio given a 1 basis point increase in rates. A negative PV01
figure relates to a net asset position and will create a loss if rates rise. A positive PV01 figure relates to a net liability position and will create a profit if rates rise.
The effects of a 1 basis point increase in interest rates are £0.01m (2012: £0.04m) and a 1 basis point decrease £0.01m (2012: £0.04m).
3.1.3 Swap spread risk Audited
The Bank is also exposed to swap spread risk arising within the liquid asset portfolios whereby a proportion of assets are held in fixed rate government securities
and are accompanied by an interest rate swap to hedge against changes in interest rates. However, there remains a risk associated with the possible movement
in the spread between sovereign debt yields and swap rates and therefore creates market value volatility. For example the market value falls if the yield on the
sovereign debt increases more than swap rates, as the market value loss on the sovereign debt will then be higher than the market value profit on the swap.
The risk is only crystallised if the sovereign debt and the associated swap are sold. The market value movements are monitored and the risk is controlled via
government versus swap mark to market limits.
3.2 Currency risk Audited
The Bank’s treasury foreign exchange activities primarily involve:
• providing a service in meeting the foreign exchange requirements of customers;
• maintaining liquidity in euros and US dollars by raising funds and investing these to generate a return; and
• performing limited intraday trading and overnight positioning in major currencies to generate incremental income.
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The Co-operative Bank plc Annual report and accounts 2013