Annual Report & Accounts 2009 - Anglo Irish Bank

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Notes to the financial statements continued 51. Risk management and control continued 124 Market risk continued Banking book risk Banking book positions are those acquired with the intention of holding them to maturity in the normal course of business. Interest rate risk in the banking book arises from a combination of lending, funding and non-trading treasury activities. Group Treasury manages the market risk associated with all of these activities on a consolidated basis. Market risk in the banking book arises primarily from exposure to changes in interest rates. The Group's financial assets and liabilities have interest rates that are reset at different times or under different bases. There is a potential impact on earnings and value that could occur when liabilities cannot be repriced as quickly as assets in a falling interest rate environment or when assets cannot be repriced as quickly as liabilities in an environment of rising rates. Banking book interest rate risk is measured by establishing the repricing characteristics of each non-trading asset, liability and derivative instrument. The risk is managed by Group Treasury through basis point sensitivity and nominal position limits. Group Risk Management provides daily reporting of banking book risk positions against approved PVBP and nominal position limits. It provides monthly reporting to ALCO and the Risk and Compliance Committee on banking book activity with analysis of all significant risk positions, including the results of stress testing. The following table shows the sensitivity of the Group’s banking book, including non-trading book derivatives, to an assumed 100 basis point ('bp') increase in interest rates in terms of the impact on net interest income and profit before taxation over a twelve month period: At 31 December 2009 At 30 September 2008 EUR GBP USD €m €m €m (23) (4) 9 (13) 27 (22) This measure assumes that for each of the currencies above, interest rates for all maturities move at the same time and by the same amount. It does not incorporate the impact of management actions that, in the event of an adverse rate movement, could reduce the impact on net interest income. In practice, interest rate risk is actively managed and the impact of yield curve movements on interest income will be different from that calculated by this measure. Risk measurement using basis point sensitivity is supplemented with regular stress tests assessing the impact of extreme market moves on risk positions. The stress tests include measurement of the sensitivity of positions to extreme yield curve movements. There are also scenario tests based on observed historical occurrences of market volatility, for example the bond market crisis of 1998 or the credit market dislocation of 2008, as well as on a range of hypothetical combinations of market stresses. The exposure of equity reserves to interest rates arises from two main sources. Included in the Group's available-for-sale portfolio are liquid fixed rate government securities. A one basis point change in market interest rates would result in a change in the value of this portfolio of €0.4m (30 September 2008: €0.5m). These unrealised movements are recognised in the available-for-sale reserve, a component of other reserves. The Group has also designated interest rate swaps and forward rate agreements as cash flow hedges in various relationships (note 21). A one basis point change in market interest rates would result in a change in the cash flow hedging reserve of €1.1m (30 September 2008: €0.7m). Group Treasury manages interest rate risk on a consolidated Group basis. The following tables analyse the Group's non-trading assets and liabilities into relevant repricing groupings. Assets and related liabilities held in respect of liabilities to customers under investment contracts and non-interest bearing assets and liabilities are not included.
Interest rate sensitivity gap Cumulative interest rate sensitivity gap Interest rate sensitivity gap Cumulative interest rate sensitivity gap The Group 31 December 2009 Not more Between Between six Between Over than three three and months and one and five months six months one year five years years €m €m €m €m €m (3,441) 2,485 (4,380) 3,288 252 (3,441) (956) (5,336) (2,048) (1,796) The Group 30 September 2008 Not more Between Between six Between Over than three three and months and one and five months six months one year five years years €m €m €m €m €m 3,513 (1,397) (309) 3,093 399 3,513 2,116 1,807 4,900 5,299 Market risk in the banking book also arises from exposure to changes in exchange rates. Structural foreign exchange risk principally arises from the Group’s net investments in its Sterling ('Stg£') and US dollar ('US$') based foreign operations. It is Group policy to mitigate structural foreign exchange risk by matching all material foreign currency investments in operations, whose functional currency is not euro, with funding in the same currency. The Group has risk weighted assets denominated in non-euro currencies, primarily in Stg£ and US$. The Group has Stg£ and US$ capital resources though capital is predominantly euro based (note 53). As a result, the Group's regulatory capital ratios are sensitive to foreign exchange movements. Management monitor this exposure on an ongoing basis. Anglo Irish Bank Annual Report & Accounts 2009 The foreign currency denominated funding used to hedge the net investments in the Group's foreign operations has a carrying amount of €1.7bn (30 September 2008: €0.8bn). In the period to 31 December 2009 the ineffectiveness recognised in the income statement in respect of hedges of net investments in foreign operations was €nil (30 September 2008: €nil). Derivatives A derivative is a financial instrument which defines certain financial rights and obligations that are contractually linked to interest rates, exchange rates or other market prices. Derivatives are an efficient and cost effective means of managing market risk. As such, they are an indispensable element of risk management for the Group. It is recognised that certain forms of derivatives can introduce risks which are difficult to measure and control. For this reason it is Group policy to place clear boundaries on the nature and extent of its participation in derivatives markets and to apply industry regulatory standards to all aspects of its derivatives activities. The Group's derivatives activities are governed by policies approved by the Risk and Compliance Committee. These policies relate to the management of the various types of risks associated with derivatives, including market risk, liquidity risk, credit risk and operational risk. The Group designates certain derivatives as either fair value hedges (where the Group hedges the changes in fair value of recognised assets or liabilities or firm commitments) or cash flow hedges (where the Group hedges the exposure to variability of cash flows attributable to recognised assets or liabilities or highly probable forecast transactions). With the exception of designated hedging derivatives, as defined by IAS 39, derivatives are treated as held for trading. The held for trading classification comprises the Group's trading book, economic hedges which do not meet the strict qualifying criteria for hedge accounting and derivatives managed in conjunction with financial instruments designated at fair value. Further details in respect of derivatives are disclosed in note 21. The Group's accounting policy for derivatives is set out in note 1. 125
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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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