Annual Report & Accounts 2009 - Anglo Irish Bank

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Notes to the financial statements continued 51. Risk management and control continued 122 Aged analysis of financial assets past due but not impaired The following tables present an analysis of financial assets, other than those carried at fair value, where contractual interest or principal payments are past due but impairment is not appropriate as the level of collateral and the present value of estimated future cash flows available to the Group is sufficient. Other Business Other Financial Commercial Residential Banking Lending Assets Total €m €m €m €m €m €m Past due 1 to 30 days 962 68 263 127 - 1,420 Past due 31 to 60 days 665 319 14 52 - 1,050 Past due 61 to 90 days 346 19 14 52 - 431 Past due 91 days and over 943 262 193 461 - 1,859 Total 2,916 668 484 692 - 4,760 Other Business Other Financial Commercial Residential Banking Lending Assets Total €m €m €m €m €m €m Past due 1 to 30 days 240 76 4 56 - 376 Past due 31 to 60 days 143 31 1 11 - 186 Past due 61 to 90 days 124 46 - 6 - 176 Past due 91 days and over 744 155 28 117 - 1,044 Total 1,251 308 33 190 - 1,782 Collateral The Group 31 December 2009 The Group 30 September 2008 The acceptance of both financial and non-financial collateral is central to the risk mitigation and underwriting policies of the Group. The nature of the collateral held will reflect the transaction being underwritten. Loans and advances to customers are collateralised principally by charges over real estate assets, business assets and liens on cash deposits, and are supplemented by personal guarantees. In the case of clients with more than one transaction, the Bank seeks to cross-collateralise security to strengthen repayment cover. Due to the significant dislocation in property markets and the lack of transactional activity over the period, it is impracticable for the Bank to obtain reliable fair values for individual collateral held against past due or impaired financial assets as at 31 December 2009. However declines in prices of approximately 50% since the market peak for Irish commercial property reflected in certain market indices would appear to be a fair indicator of the scale of the decline in collateral values over the past twelve months. Ireland, which represents the majority of impaired and past due loan balances, experienced the most significant drop in valuations compared with price declines in the UK and US markets. At 30 September 2008, collateral of €834m was held against impaired loans and advances to customers of €957m. During the period the Group repossessed collateral, consisting of land and property, of €6m on balances of €20m (2008: €7m on balances of €15m). It is the Group’s policy to dispose of repossessed assets in an orderly fashion. The proceeds are used to reduce or repay the outstanding balance. The Group does not use repossessed assets for business purposes. Loans and advances to banks are generally unsecured except where securities are held as collateral in reverse repurchase agreements (note 22). Credit risk in respect of exposures to certain monetary financial institutions is mitigated by financial guarantees from parent institutions or governments. The Group has executed Collateral Support Agreements ('CSAs') with its principal interbank derivatives counterparties. Under the terms of a CSA, if the aggregate market value of a set of derivative contracts between two parties exceeds an agreed threshold amount, the party which would be exposed to loss in the event of default receives a deposit of cash or eligible securities equal to the excess aggregate value over the threshold.
Netting arrangements The Group has entered into master netting agreements with counterparties with which it undertakes a significant amount of transactions, primarily in the interbank markets for derivative instruments and repurchase transactions. As these transactions usually settle on a gross basis, the ability to settle on a net basis in the event of a default substantially reduces the overall credit risk. Parent Bank credit risk Additional information on the parent Bank's credit risk is contained in note 56. Market risk Market risk is the risk of a potential adverse change in the Group’s income or financial position arising from movements in interest rates, exchange rates or other market prices. Market risk arises from the structure of the statement of financial position, the execution of customer and interbank business and from trading activities. The Group recognises that the effective management of market risk is essential. The Group's exposure to market risk is governed by policies prepared by Group Risk Management in consultation with Group Treasury and approved by ALCO and the Risk and Compliance Committee. All risk limits are approved by ALCO and the Risk and Compliance Committee. Exposure to market risk is permitted only in specifically designated business units and is centrally managed by Group Treasury. In other units, market risk is eliminated by way of appropriate hedging arrangements with Group Treasury. Market risk throughout the Group is measured and monitored by Group Risk Management, operating independently of the business units. The table below summarises the VaR levels of the Group’s trading book for the period using a 99% confidence level. 1 Day Time Horizon Anglo Irish Bank Annual Report & Accounts 2009 Trading book risk The trading book consists of positions arising primarily from client transactions in a range of financial instruments. The interest rate trading book includes interest rate swaps, currency swaps, interest rate futures, forward rate agreements and options. Traded foreign exchange risk arises from the Group’s lending and funding activities as well as from its corporate and interbank foreign exchange business. All trading book risks are managed centrally by Group Treasury. The primary trading book market risk measure is a Value at Risk ('VaR') model that is based on a historical simulation methodology. It is implemented using a 99% confidence level and two years of historic data. The methodology takes into account inter-relationships between different market variables, for instance between interest rates and foreign exchange rates, and captures the risks associated with option positions in interest rate and foreign exchange instruments. Although an important and industry standard measure of risk, VaR has its limitations as a result of its use of historical data, frequency of calculation and holding periods. Additionally, the use of confidence intervals does not give any information about potential losses when the confidence level is exceeded. For these reasons, the Group also uses a variety of other methodologies in measuring market risk. These include, but are not limited to, stress testing and sensitivity analysis. 10 Day Time Horizon 31 December 30 September 31 December 30 September 2009 2008 2009 2008 €m €m €m €m At end of period 0.3 0.4 0.9 1.3 Average 0.5 0.2 1.6 0.6 Minimum 0.3 0.1 0.9 0.3 Maximum 0.8 0.7 2.5 2.2 The average VaR for the period ended 31 December 2009 was higher than for the previous year. Risk positioning continued to be low in 2009 in terms of interest rate and foreign exchange risk sensitivities, reflecting a cautious stance in the face of uncertainty in global financial markets. The higher average VaR for the period resulted from the significantly higher volatility in certain key market data for the 15 months to 31 December 2009. Group Risk Management provides daily reporting of trading book risk positions against all approved VaR, Present Value of a Basis Point ('PVBP'), option sensitivity and stop-loss limits. It provides monthly reporting to ALCO on trading book activity with analysis of all significant risk positions, including stress testing of positions against a range of extreme market scenarios. There is also monthly reporting to the Risk and Compliance Committee on compliance with trading limits. 123
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Annual Report & Accounts 2009
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Contents Page Chairman’s statemen
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Legacy matters The Bank is continui
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Jim Brydie was appointed Head of Gr
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Business review This business revie
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Divisional lending balances by sect
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holdings, reduced investment cash f
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30 September 2008. Average total cu
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Income statement - treasury impairm
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to acquire these assets they are in
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Board of Directors Donal O’Connor
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In keeping with our environmental p
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Principal risks and uncertainties T
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Credit risk Credit risk is the risk
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Report of the Directors The Directo
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Corporate governance statement On 1
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Corporate governance statement cont
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Independent Auditors' report to the
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Consolidated income statement For t
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Consolidated statement of financial
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Consolidated statement of changes i
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Statement of cash flows For the 15
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Notes to the financial statements I
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Notes to the financial statements c
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Supplementary information Consolida
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Annual Report & Accounts 2009 - Anglo Irish Bank

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