Annual Report & Accounts 2009 - Anglo Irish Bank

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.
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