IBRC annual report for 2011 - Irish Bank Resolution Corporation ...

Irish Bank Resolution Corporation LimitedAnnual Report & Accounts 2011Parent Bank credit riskAdditional information on the parent Bank's credit risk is contained in note 55.Liquidity and funding riskDefinitionLiquidity and funding risk is the risk that the Group does not have sufficient financial resources available at all times to meet itscontractual and contingent cash flow obligations or can only secure these resources at excessive cost.ObjectiveThe current objective for the management of liquidity and funding risk is to continue to meet cash flow obligations as they falldue and minimise the funding required from the Bank's stakeholders. The future funding and liquidity strategy and balancesheet structure will be largely reliant on the Bank's stakeholders and the relevant authorities.On 24 February 2011, under the AIB Transfer Order, the majority of the Irish and UK customer accounts, including those held inthe Bank's Isle of Man subsidiary, and €12.2bn nominal of NAMA senior bonds were transferred by the Bank to AIB and AIB UK(note 13). Certain customer accounts were retained, including those linked to customer loans, structured deposit-linkedproducts and those accounts denominated in minor currencies. In total €8.3bn (Ireland and UK: €6.9bn; Isle of Man: €1.4bn) ofcustomer accounts were transferred. At 31 December 2011 the remaining customer deposits of €0.6bn represent only 1% oftotal funding and are subject to the commitments that the State made to the EC in relation to the State aid provided to theGroup. A Monitoring Trustee was approved by the EC on 8 December 2011 to report on a quarterly basis for a period of threeyears on the Group's adherence to these Restructuring Plan commitments.The Group currently borrows from central banks through both open market operations with monetary authorities and throughspecial funding facilities with the Central Bank of Ireland (note 37). The Group has total borrowings from central banks at31 December 2011 of €42.2bn (2010: €45.0bn), including €40.1bn (2010: €28.1bn) borrowed through special funding facilitiesprovided by the Central Bank of Ireland.Structural foreign exchange risk principally arises from the funding shortfall between the Group's sterling and US dollar lendingactivities and the Group's funding in those currencies.The US loan sale reduced the US dollar funding requirement, although there remains a requirement to fund sterling loansthrough foreign exchange markets. The long term foreign exchange swap agreements executed with the NTMA have led to asignificant improvement in the Group's foreign exchange funding. These transactions provide US dollar and sterling funding inexchange for euros and reduce the requirement to source foreign currency in the interbank or wholesale foreign exchangemarkets.In November 2010 the Minister for Finance put in place a guarantee for the Bank which covered amounts payable in relation toderivative and certain other interbank transactions. In accordance with the terms of this guarantee, the Bank may only enterinto derivative transactions for balance sheet management purposes. There is no fee payable for this guarantee.In the context of liquidity and funding risk the Bank actively monitors compliance with the contractual covenants contained inthe Group’s debt securities programmes and subordinated capital instruments. Significantly, CISA includes important provisionsthat are designed to prevent a potential event of default becoming applicable because of an order or requirement made underCISA or anything done on foot of such an order or requirement.Liquidity and funding risk is monitored centrally by ALCO, whose responsibilities in relation to liquidity include, but are notlimited to:▪ Providing the Board and relevant Board Committees with regular liquidity updates;▪ Setting liquidity risk strategy for the Group;▪ Setting liquidity risk appetite for the Group;▪ Approving and maintaining Group funding and liquidity policy;▪ Approving and maintaining the Group contingency funding plan;▪ Maintaining internal and external liquidity risk limits; and▪ Liquidity stress testing and scenario analysis.123