Annual report and accounts 2009 (PDF) - Coventry Building Society

RISK MANAGEMENT REPORT(continued)Foreign currency riskForeign currency risk arises as a result of the Society’sactivities in raising funds and making investments in foreigncurrencies. This is done to ensure wholesale funds areobtained cost effectively across a wide pool of potentialproviders, but exposes the Society to the risk of anappreciation in the value of foreign currency denominatedliabilities or a deterioration in the value of the foreigncurrency denominated assets. The risk is managed throughthe use of currency swaps and foreign currency forwardcontracts and also, where appropriate, by the matching offoreign currency liabilities with assets denominated in thesame currency.Details of the Society’s exposure to interest rate and foreigncurrency risk are contained in note 40 to the Accounts.House price riskHouse price risk arises from the ‘no negative equity’guarantee given to borrowers who have a lifetime mortgageproduct, whereby the borrower is guaranteed that theamount recoverable by the Society at the end of themortgage will not exceed the value of the property.Under these loans, the borrower receives an advance butmakes no payments of interest or principal until the loan isredeemed. The interest is added to the loan and recoveredby the Society when the loan is redeemed. The ‘no negativeequity’ guarantee therefore exposes the Society to the riskthat the value of the property at the time of redemption islower than the loan plus accumulated interest.The Society manages this risk by granting loans at relativelylow loan to value ratios subject to the age of the borrower.The risks presented by house price trends are evaluatedthrough stress testing and monitored by the ALCO and,through this committee, by the Risk ManagementCommittee and board.Details of the Society’s exposure to house price risk arecontained in note 40 to the Accounts.Liquidity riskLiquidity risk is the risk that the Society will be unable tomeet its financial obligations as they fall due. The risk ismanaged principally by the holding of cash and other easilyrealisable liquid assets. The minimum ratio of these liquidassets to the Society’s liabilities is set by statute andadherence to this is monitored by FSA. Day-to-daymanagement of the Society’s liquidity position is theresponsibility of the treasury function and is monitored bythe ALCO and, through this committee, by the RiskManagement Committee and board.Details of the Society’s exposure to liquidity risk arecontained in note 40 to the Accounts.Operational riskOperational risk is the risk of loss arising from inadequateor failed internal processes, people and systems or fromexternal events, including legal risks. These risks aremanaged as an integral part of the operations of each ofthe Society’s business units. Management have aresponsibility to understand how operational risk impactstheir area of the business and for putting in place controlsor mitigating activities. The operational risk departmentensures co-ordination of the Society’s risk assessment andresulting control activities, reporting to the Operational Riskand Compliance Committee and through this committee tothe Risk Management Committee and board.It is also clear that for all financial organisations to followgood practice and build trust with customers there is aneed for effective regulation. The Society’s compliance,treasury risk and legal teams, as well as its externaladvisors, are charged with ensuring the Society meets itsregulatory obligations. In recent times there have been alarge number of regulatory changes. However, there is adanger that new regulation which treats the mutual sectorin the same way as the ‘plc’ sector, or developments thatencourage the introduction of new capital rewarded byprofit, will damage the ability of the mutual sector tocompete and grow whilst sticking to its values.20