The Case Study - Seylan Bank

158Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statementsterm liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensurethat sufficient liquidity is maintained.All liquidity policies and procedures are subject to review and approval by ALCO. Daily reports cover theliquidity position of the Bank. A summary report, including any exceptions and remedial action taken, issubmitted regularly to ALCO.Exposure to Liquidity RiskThe key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to depositsfrom customers. For this purpose net liquid assets are considered as including cash and cash equivalents.Liquidity Management 2009 2008 2009 2008Domestic DomesticBanking Unit Banking UnitForeignCurrencyBanking UnitForeignCurrencyBanking UnitAs at 31st December 28.80% 20.11% 24.94% 22.11%Highest 28.80% 22.70% 24.94% 22.72%Lowest 11.87% 20.09% 12.85% 20.25%Average 19.19% 21.55% 20.24% 21.33%(e) Market RisksMarket risk is the risk that changes in market prices, such as interest rates, equity prices, foreignexchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) willaffect the Bank’s income or the value of its holdings of financial instruments. The objective of marketrisk management is to manage and control market risk exposures within acceptable parameters, whileoptimising the trading portfolios for risk management purposes. Overall authority for market risk is vestedin ALCO.Market risk is the risk arising from fluctuations in the market price/value of tradable assets such asforeign exchange, fixed income securities and shares that are held for trading purposes where the Bankholds either long positions or short positions of such assets.The two risk components of the market risk most applicable to the Bank are foreign exchange risk andinterest rate risk.(e.I) The Foreign Exchange Risk arises from the foreign exchange positions maintained by the Bankwhere either the foreign currency denominated assets exceed such liabilities (long positions) or the foreigncurrency denominated liabilities exceed the assets (short positions). Such long or short positions could alsobe created through the sale or purchase transactions both in spot and forward markets as well as throughswap transactions. Bank is conservative and prudent in its management of foreign exchange exposures andhas set out limits on its transactions and exposures including dealer limits, portfolio limits, daylight limits,overnight limits, long position limits, short position limits, counter party limits, etc.(e.II) Interest Rate Risk arises from the movement of interest rates affecting the value of tradable fixedincome securities as well as the interest rate re-pricing gaps of the interest rate sensitive assets andliabilities. The Bank evaluates the risk level of the tradable fixed income securities portfolio by assessingthe sensitivity of the market value towards a change of interest rates by one hundred basis points, whichis one percentage point. The size and duration of the trading portfolio is capped based on the potentialrisk exposure as well as the board approved limits placed on absolute values. Banks also typically have