MBNA CANADA BANK - Basel II Pillar 3 Disclosures
MBNA CANADA BANK - Basel II Pillar 3 Disclosures
MBNA CANADA BANK Basel II Pillar 3 Disclosures As at December 31, 2008
2 1. Scope of Application Qualitative disclosures This document sets out the Basel II Pillar 3 disclosures applicable to MBNA Canada Bank (“the Bank”) including its wholly owned subsidiaries, MBNA Canada Properties Co. and CUETS Financial Ltd. All intercompany transactions and balances have been excluded. On January 1, 2009, CUETS Financial Ltd. was amalgamated with the Bank after regulatory approvals were obtained. MBNA Canada Bank (the “Bank”) is a wholly owned subsidiary of FIA Card Services, N.A., which is, in turn, a subsidiary of Bank of America Corporation (“BAC”).
The Bank is licensed to operate as a Schedule II Bank in Canada with full powers under Canada’s Bank Act (the “Bank Act”) as a foreign Bank subsidiary. The Bank was incorporated by Letters Patent dated August 22, 1997 and received the Order to Commence and Carry-on Business from the Office of the Superintendent of Financial Institutions (“OSFI”) on November 22, 1997. The Bank markets, issues, and services credit card and other credit card access consumer loans to customers throughout Canada. In accordance with Bank of America’s Pillar 3 protocol, these disclosures are published on Bank of America’s corporate website (www.bankofamerica.com).
2. Capital Structure Qualitative disclosures The Bank’s total capital consists of tier 1 capital as defined in OSFI’s regulatory guideline which includes items such as common shares, retained earnings and contributed surplus. Tier 1 capital is reduced by items such as goodwill and net intangible assets (in excess of 5% of gross tier one capital) and securitization related adjustments. The Bank does not hold any tier 2 or tier 3 capital. Quantitative disclosures (dollars in thousands) As at December 31, 2008 Tier 1 capital Common shares (no par value; unlimited authorized; 16,250 shares issued and outstanding as at December 31, 2008) $ 325,000 Contributed surplus 16,661 Retained earnings 1,030,439 Gross tier 1 capital 1,372,100 Goodwill (58,826) Net intangible assets (31,137) Net tier 1 capital 1,282,137 Securitization related adjustments (97,008) Adjusted net tier 1 capital 1,185,129 Tier 2 and tier 3 capital - Total capital $ 1,185,129
3 3. Capital Adequacy Qualitative disclosures Internal Capital Adequacy Assessment Process (“ICAAP”) The Bank manages its capital position to maintain a strong and flexible financial position, which enables it to manage through economic cycles, take advantage of growth and strategic opportunities and maintain ready access to financial markets. The Bank’s capital management policy defines the Bank’s risk governance framework and controls for managing its capital position. The Capital Management policy is reviewed and approved by the Bank’s Board of Directors (“the Board”) and the Treasury Group at least annually.
In order to ensure that risk and reward are appropriately balanced, the Bank has implemented internal governance and risk management processes to identify, measure, monitor, and manage various risks across the company. Successful risk identification and measurement requires having a comprehensive process to quantify, measure and aggregate these various risks in order to ensure the Bank’s capital resources are sufficient to cushion volatility due to unexpected losses. This measurement process constitutes a key element of the Bank’s ICAAP, which is principally based on BAC’s Economic Capital framework.
Bank of America defines its Economic Capital measure as the amount of capital required to maintain solvency and cover unexpected future losses over a one-year time horizon at a 99.97% confidence level, which equates to a AA credit rating. To ensure consistent treatment and the unbiased evaluation of businesses, Bank of America applies this common standard to all business activities and risk categories. The Economic Capital framework has been in existence since 1993 and continues to evolve with advances in risk measurement theory and practices. BAC’s Economic Capital framework incorporates credit, country, market, and business risk capital.
In addition, qualitative adjustments are made to reflect the competitive and control environment for each line of business. The Bank also has in place governance and control mechanisms through risk groups, planning and forecasting processes, models and strategies to manage and mitigate risks. Planning and forecasting processes facilitate analysis of actual versus planned results, and provide an indication of unanticipated risk levels. Risk groups bring together line of business management, risk management and other personnel with responsibility for actively monitoring performance against plan, limits and potential issues.
New strategies or processes are subject to formal approval through management committees that explicitly requires an assessment of all incremental risks faced by the Bank. The Bank’s risk management framework is consistent with Bank of America’s framework and is structured around its “three lines of defenses”: lines of business, enterprise functions and corporate audit. The lines of business are responsible for identifying, quantifying, monitoring, mitigating and controlling risks within their lines of business. Lines of business make and execute their business plan and are therefore closest to the changing nature of risks and are best able to take actions to manage and mitigate those risks.
The enterprise functions which consist of Risk Management, Compliance, Finance, Technology, Human Resources and Legal functions are independent of the lines of businesses and have the responsibility to develop and implement policies and practices to assess and manage the Bank’s risks. Corporate audit, the third line of defense, provides an independent assessment of the Bank’s management and internal control systems and compliance with policies, standards and procedures and applicable laws and regulations, based on a rotational risk-based audit strategy.
The formal structures and processes used to manage risk represent only one element of the overall risk management process. Corporate culture and the actions of the Bank associates are also critical to effective risk management. Through the Code of Ethics and communicated core values, the Bank sets a high standard for associates. The Code of Ethics provides a framework for all associates to conduct themselves with the highest integrity in the delivery of products or services to customers. The Bank instills a risk-conscious culture through communications, training, policies, procedures and organizational roles and responsibilities.
Additionally, the Bank continues to strengthen the linkage between the associate performance management process and individual compensation to encourage associates to work toward corporate-wide risk goals.
4 Quantitative disclosures The following table shows the Bank’s capital requirements as at December 31, 2008 under the Basel II Pillar 1 framework: (dollars in thousands) As at December 31, 2008 Total tier 1 capital1 $ 1,185,129 Credit risk Bank 79,867 Other retail 4,613,432 Securitizations 17,495 Other 398,277 Total credit risk 5,109,071 Market risk - Operational risk 1,443,469 Total risk weighted assets2 $ 6,552,540 Total tier 1 capital ratio 18.09% Total capital ratio 18.09% 4. Credit Risk – General Disclosures Qualitative disclosures Credit risk is the risk of financial loss arising from the inability of a borrower or counterparty to meet its obligations.
Credit risk is the most significant risk facing the Bank. The Bank manages credit risk based on the risk profile of the borrower or counterparty, repayment sources and other support given current events, conditions and expectations. The Bank’s Board has overall responsibility for credit risk management of the Bank. The Board has designated senior officers of the Bank and delegated power to such officers to manage the business and affairs of the Bank. The Board is responsible for reviewing and approving all policies impacting credit risk management. In addition, the Board reviews and assesses portfolio quality through regular reporting which includes the quality of newly acquired accounts, the quality of the existing loan portfolio, delinquency trends, and loss trends.
Credit risk management begins with initial underwriting and continues through the borrower’s credit cycle. Statistical techniques in conjunction with experiential judgment are used in all aspects of portfolio management including underwriting, product pricing, setting credit limits, operating processes and metrics to quantify and balance risks and returns. In addition, credit decisions are statistically based with tolerances set to decrease the percentage of approvals as the risk profile increases. Statistical models are built using detailed behavioral information from external sources such as credit bureaus and/or internal historical experience.
These models are a critical component of the Bank’s credit risk management process and are used in the determination of new and existing credit decisions, portfolio management strategies, determination of the allowance for credit losses, and Economic Capital allocations for credit risk.
1 The Bank does not hold any tier 2 or tier 3 capital and therefore tier 1 capital is equal to total capital 2 Credit risk is determined under the standardized approach, as defined in the guideline issued by OSFI; market risk is not currently applicable; operational risk is determined under the basic indicator approach, as defined in the guideline issued by OSFI.
5 The Bank also has in place reporting to review and monitor trends related to the quality of acquired and existing accounts as well as delinquency and loss trends. Management of the Bank reviews, measures, and manages credit exposure in numerous ways in order to achieve the desired mix.
This monitoring includes assessment of credit concentration by geographic region and risk segment to ensure that risk concentrations do not result in undesirable levels of risk. Sensitivity and stress testing are used to ascertain the size of probable losses under a range of scenarios for the loan portfolio. These scenarios are performed using different market and economic assumptions to examine the impact on portfolio metrics. Stress tests are also employed to assess the portfolio’s vulnerability to the effect of an economic downturn.
The Bank maintains the allowance for credit losses at an amount, in management’s opinion, that is sufficient to absorb probable net credit losses inherent in the Bank’s loans at the reporting date. To project probable net credit losses, the Bank regularly performs a migration analysis of delinquent and current accounts and prepares a Bankruptcy filing forecast. Migration analysis is a technique used to estimate the likelihood that a loan may progress through the various delinquency stages and ultimately charge-off. On a quarterly basis the Bank reviews and adjusts these estimates, taking into account the impact of economic conditions on the borrowers’ ability to repay, past collection experience, the risk characteristics and composition of the portfolio, and other factors.
The Bank then reserves for the projected probable net credit losses based on its projection of these amounts. A provision is charged against earnings to maintain the allowance for credit losses at an appropriate level. The Bank’s policy is to charge- off open-end delinquent retail loans by the end of the month in which the account becomes 180 days contractually past due. Delinquent Bankrupt accounts charge-off the earlier of the end of the second calendar month following the receipt of notification of filing from the applicable court or the applicable 180 day time frame described above. If an account has been charged-off, it may be sold to a third party or retained by the Bank for recovery.
The Bank records the current period recoveries of loan principal receivables that previously charged-off as a reduction in the provision for credit losses. The proceeds received from the sales of charged-off loans are also recorded as recoveries.
The Bank does not assign the allowance for credit losses to loans based on their term to maturity. The Bank does not assess loan impairment on specific loan basis due to the homogeneous composition of the portfolio which is comprised of individually small retail credit card and consumer loans. Instead, impairment is collectively evaluated on a portfolio basis.
6 Quantitative disclosures The following table shows the Bank’s total gross credit risk exposures for financial instruments measured as the amount outstanding: (dollars in thousands) As at December 31, 2008 Outstanding amount Year to date average Cash and due from Banks $ 61,697 $ 52,186 Interest-bearing deposits with banks 254,803 239,379 Securities Available-for-sale financial assets 2,482 2,154 Securities designated at fair values 34,336 19,305 Gross loans 6,306,502 4,856,616 Accounts receivable from securitization 246,841 429,622 Derivative instruments 76,648 37,238 Due from related parties 825 108 Other assets 2,194 4,105 Total $ 6,986,328 $ 5,640,713 Commitments to extend credit to customers are not reflected in the maximum credit exposure.
The Bank can reduce or cancel a loan commitment by providing the required prior notice to the customer. These arrangements are subject to the Bank’s normal credit standards, financial controls and monitoring procedures. All of the Bank’s credit exposures are measured under the standardized approach under the Basel II framework. For capital adequacy, the Bank leverages BAC’s Economic Capital framework.
Concentration of credit risk may arise when the ability of a number of borrowers or counterparties to meet their contractual obligations are similarly affected by external factors. Examples of concentration of credit risk would include geographic, industry, single name and environmental factors. The Bank markets, issues, and services credit card and other consumer loans to customers throughout Canada. Concentration of credit risk is mitigated by the nature of the Bank’s portfolio as there is no single name concentration of credit risk (Single borrower in excess of 5% of the total carrying value of loans).
The following table represents the distribution of the Bank’s gross loans by geographic distribution: (dollars in thousands) As at December 31, 2008 Alberta $ 750,071 British Columbia 889,447 Manitoba and Saskatchewan 467,195 Quebec 1,147,125 Ontario 2,647,093 Maritimes (NB, NS, PEI, NF) 382,205 Territories (NWT, Yukon, Nunavut) 23,366 Total $ 6,306,502
7 The following table shows the maturity profile of the carrying value of the Bank’s gross loans as at December 31, 2008 based upon contractual repayment obligations: (dollars in thousands) Less than 3 months 3 – 12 months 1 – 3 years 3 – 5 years More than 5 years No Stated Maturity Total Loans $ 141 5,054 127,596 365,898 103,853 5,703,960 $ 6,306,502 The following table provides an analysis of the Bank’s gross loans by delinquency stage: (dollars in thousands) As at December 31, 2008 $ % Current $ 5,783,596 91.7 Past due up to 30 days 336,140 5.3 Past due 31 – 60 days 78,936 1.3 Past due 61 - 90 days 41,273 0.7 Past due 91- 120 days 26,603 0.4 Past due 121-150 days 21,246 0.3 Past due 151-180 days 18,352 0.3 Past due more than 180 days 356 - Total $ 6,306,502 100.0 The following table represents the distribution of the Bank’s past due gross loans greater than 35 days by geographic distribution: (dollars in thousands) As at December 31, 2008 Alberta $ 20,401 British Columbia 25,932 Manitoba and Saskatchewan 11,986 Quebec 30,337 Ontario 82,019 Maritimes (NB, NS, PEI, NF) 12,087 Territories (NWT, Yukon, Nunavut) 2,263 Total $ 185,025
8 The following table summarizes the changes in allowance for credit losses for 2008: (dollars in thousands) As at December 31, 2008 Allowance for credit losses, beginning of year $ 102,514 Acquired allowance - Provision for credit losses: Credit card 230,468 Other consumer 39,249 Commercial - Total provision for credit losses 269,717 Credit losses: Credit card (118,899) Other consumer (51,165) Commercial - Total credit losses (170,064) Recoveries: Credit card 16,536 Other consumer 3,503 Commercial - Total recoveries 20,039 Net credit losses (150,025) Allowance for credit losses, end of year $ 222,206 5.
General Disclosures for Exposures Related to Counterparty Credit Risk Qualitative disclosures The Bank also exposes itself to counterparty credit risk on its derivative financial instruments. The Bank utilizes interest rate swaps to enhance its ability to manage interest rate risk that exists as part of its asset/liability management program. Interest rate swaps are entered into for periods that match the related underlying exposures and do not constitute positions independent of these exposures. The Bank does not enter into derivative financial instruments for trading purposes. If the counterparty fails to fulfill its performance obligations under a derivative contract, the Bank’s credit risk will equal the fair value gain in the derivative.
Generally, when the fair value of the derivative contract is positive, this indicates that the counterparty owes the Bank, thus creating credit risk for the Bank. When the fair value of a derivative contract is negative, the Bank owes the counter-party and, therefore assumes no credit risk. In order to minimize the amount of credit risk, the Bank only enters in to derivative financial instruments with counter-parties who have investment grade credit ratings, as rated by the major rating agencies. The Bank’s two counterparties on its derivative financial instruments had credit ratings of AA- and A+ at December 31, 2008 as per the Standard & Poor’s credit ratings.
In the event of a ratings downgrade of the short-term credit rating of counterparty, the counterparty is required to fund a swap receipt reserve account to support its obligation under the interest rate swap agreement.
Stress testing is used by the Bank to estimate the change in value of the derivative portfolio that may result from extreme, though plausible, market movements. Stress tests are run for hypothetical scenarios and the results are presented monthly to senior management as part of the risk reporting process.
9 The Economic Capital allocation for credit risk from counterparty exposures is not allocated to the line of business level. The Bank has however included in its ICAAP a capital charge for counterparty credit risk based on the Pillar 1 allocation under the Basel II framework.
Quantitative disclosures The details of the interest rate swaps recognized in the Bank’s consolidated balance sheet are as follows: Remaining Term to Maturity Notional Amount Pay Rate at the Year End Weighted Average Receive Rate Replacement Cost Credit Equivalent Amount Risk Weighted Balance Unrealized Gain Unrealized Loss Within 1 year - 1 to 3 years $ 422,500 1.82% 4.45% 30,053 32,165 6,433 30,053 - 3 to 5 years - Over 5 years $ 253,500 2.00% 5.38% 46,595 50,398 10,080 46,595 - 676,000 76,648 82,563 16,513 76,648 - 6. Securitization – Disclosure for Standardized Approach Qualitative disclosures The Bank securitizes a portion of its credit card loan principal receivables through the Gloucester Credit Card Trust (“the Trust”).
The Trust is a qualified special purpose entity (“QSPE”) as defined by the Canadian Institute of Chartered Accountants (“CICA”) in Accounting Guideline 12 (“AcG-12”), Transfers of Receivables. The Trust is demonstrably distinct from the Bank and has activities that are entirely specified in, and significantly limited by, the legal documents that established the Trust. The Bank cannot change the activities that the Trust can perform. These activities can only be changed with the approval of a majority of the beneficial interest holders, excluding the Bank. An independent trustee administers the Trust.
Credit card loan securitization involves the sale to the Trust of a pool of credit card loan receivables, and is accomplished through the Trust’s public and private issuance of asset-backed securities. Loan securitization removes credit card loan principal receivables from the Bank’s consolidated balance sheet and converts interest income, interchange income, loan fees, insurance income, recoveries on charged-off securitized loans in excess of interest paid to investors, gross credit losses and other Trust expenses into securitization income. Certificates representing undivided interests in the Trust are sold by the Trust to investors, while the Bank retains the remaining undivided interest.
The Bank retains subordinated interests in the securitized assets. These subordinated interests include an interest- only strip receivable, cash reserve accounts, accrued interest and fees on securitized loans. If cash flows allocated to investors in the Trust were insufficient to absorb expenses of the Trust, then the retained interests of the Bank would be used to absorb such deficiencies and, therefore, may not be realized by the Bank. The investors and providers of credit enhancement have no other recourse to the Bank. The Bank has no obligation to provide further funding support to either the investors or the Trust if the securitized loans are not paid when due.
The Bank does not receive collateral from any party to the securitization transactions and does not have any risk of counterparty nonperformance. The Bank’s retained interests are subordinate to the investors’ interests. The value of the retained interests is subject to credit, payment, and interest rate risks on the transferred financial assets. The Bank receives the rights to current and future revenue generated from securitized loans arising after the investors in the Trust receive the return for which they have contracted and credit losses are absorbed.
10 The Bank uses certain key assumptions and estimates in determining the value of the interest-only strip receivable. These key assumptions and estimates include projections concerning interest income, certain fees, charged-off loan recoveries, gross credit losses, and the interest rate paid to investors. Other key assumptions and estimates used by the Bank include projected loan payment rates, which are used to determine the estimated life of the securitized loan principal receivables, and an appropriate discount rate. These assumptions are used to determine the excess spread to be earned by the Bank over the estimated life of the securitized loan principal receivables.
The Bank reviews the key assumptions and estimates used in determining the fair value of the interest-only strip receivable on a regular basis and adjusts them as appropriate. The interest-only strip receivable and securitization income would be affected if these assumptions change or actual results differ from projected results.
Quantitative disclosures During 2008, the Bank sold loan principal receivables in one securitization transaction, Series 2008-1. The Bank accounted for this transaction as a sale in accordance with AcG-12. The gross proceeds from new securitizations were $454.3 million and the gain from the sale of loan principal receivables was $1.6 million. During 2008, the Bank also made payments of $1,152.3 million related to securitization maturities. Supplemental loan delinquency information is as follows: (dollars in thousands) As at December 31, 2008 Loans Outstanding $ Loans Delinquent3 $ Managed loans $ 9,850,368 $ 291,067 Securitized loans (3,543,866) (104,301) Net loans $ 6,306,502 $ 186,766 Supplemental credit loss information is as follows: (dollars in thousands) For the Year Ended December 31, 2008 Loans Managed Loans Securitized Average loans $ 8,907,502 $ 4,151,332 Gross credit losses $ 328,725 $ 158,661 Recoveries (39,370) (19,331) Net credit losses $ 289,355 $ 139,330 3 Includes loans that are past due more than 30 days
11 The components of the Bank’s retained interests from securitization are as follows: (dollars in thousands) As at December 31, 2008 Outstanding amount Risk weighted amount4 Interest-only strip receivable5 $ 34,336 $ - Seller’s interest 1,879,639 1,424,249 Billed interest and fees on securitized loans 70,823 70,823 Cash reserve accounts6 53,445 - Other subordinated retained interest7 9,227 - Total retained interests $ 2,047,470 $ 1,495,072 All of the Bank’s securitization exposures are subject to early amortization. The following table outline’s the Bank’s exposures attributable to the seller’s and investor’s interest as well as the related capital charges applicable to these exposures: (dollars in thousands) As at December 31, 2008 Outstanding amount Risk weighted amount 8 Seller’s interest $ 1,879,639 $ 1,424,249 Investor’s interest 3,451,000 17,495 Total $ 5,330,639 $ 1,441,744 7.
Operational Risk Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
The Bank takes a comprehensive approach to risk management. Risk planning is integrated with strategic, financial, customer and associate planning so that goals and responsibilities are aligned across the Bank. Risk is managed in a systematic manner by focusing on the bank as a whole and managing risk across all operations. This approach requires each associate and line of business to be engaged and work as a team in the risk management process. The foundation of the Bank’s risk governance is individual accountability. Identifying and managing risk and reward is every associate’s job. Compliance is at the core of the Bank’s cultural values and is a key component of the Bank’s risk management discipline.
This culture of accountability and compliance requires that all associates comply with all relevant laws, regulations, ethical standards and internal policies and procedures. 4 Measured under the standardized approach under the Basel II framework 5 Exposure has been fully deducted from tier 1 capital as the Bank does not hold any tier 2 capital 6 Exposures have been fully deducted from tier 1 capital 7 Exposure has been fully deducted from tier 1 capital 8 Measured under the standardized approach under the Basel II framework
12 The Board is responsible for overseeing the Bank’s governance framework and ensuring that appropriate policies have been implemented to manage operational risk. Senior business executives in conjunction with chief compliance and risk management executives are responsible for development policies, processes, procedures and risk management framework on a bank-wide basis, as well as for directing, reviewing and approving specific business line-area operational risk policies. Operational and Compliance Risk Management working in conjunction with senior business executives have developed tools and appropriate methodologies to help manage and monitor risk.
Business unit managers and associates in conjunction with risk managers are responsible for identifying, measuring, mitigating and monitoring all operational risks in each business area, both existing and emerging. They also ensure that unit-specific policies, procedures and staff are effective and sufficient to manage operational risk and that business controls are consistent with company-wide requirements.
The Bank’s measurement processes include a variety of measures, tools, processes and methodologies both quantitative and qualitative in nature. These risk measures assess the likelihood, impact and detectability, and other criteria on both inherent and residual risk basis. These indicators and tools provide assessment and direction of risk and potential changes. Operational and compliance risk reporting exists at a number of levels from the Board, executive and senior management, line of business management and Legal, Compliance, Risk, Technology, Human Resources and other support partners.
The type and frequency of operational and compliance risk reporting vary depending on the risk. Loss event data is captured monthly through bank-wide operational loss event process and is reported to the Board and senior management on a quarterly basis. Operational risk event types captured include; internal fraud, external fraud, employment practices / workplace safety, clients products and business practices, damage to physical assets, business interruption / system failures and execution, delivery and process management. Comprehensive information about these types of risk events is collected by operational risk management and includes data regarding amount, occurrence, discovery date, business area, root cause analysis, risk drivers.
Analysis of operational risk event data helps us to understand our risks, provide historical perspective of our risk experience, and help us establish basis for measuring the Bank’s operational risk exposure.
The Bank reviews and analyses information concerning operational loss experience that have occurred at other credit card providers and financial institution. The fraud and credit losses experience is shared with the Bank by the Canadian Banker’s Association and Master Card Canada. In line with the OSFI Capital Adequacy Ratio guidelines, the Bank has adopted the basic indicator approach for operational risk under the Basel II pillar I framework. The operational risk is calculated by applying a 15% factor to the Bank’s average gross income over a three year period resulting in a capital charge of $1,443 million as at December 31, 2008.
8. Equities – Disclosures for Banking Book Positions The Bank does not hold equity investments for trading purposes. The Bank does hold an equity investment which is classified as an available-for-sale security on the Bank’s balance sheet. This equity investment consists of restricted class B MasterCard International shares that cannot be publicly traded until May 2010. In May 2006 MasterCard International completed an IPO in which existing shareholders were given restricted shares in the new capital structure. As an associate member of Mastercard International, the Bank was awarded a restricted equity position in the group.
The equity investment is measured at cost in the Bank’s financial statements as the instrument does not have a quoted market price in an active market. As at December 31, 2008, the carrying value of this investment is $2.5 million and the fair value of this equity investment is $10.4 million. The fair value is determined by applying a liquidity discount to the value of a comparable class of MasterCard shares which have a quoted market price. A gain of $0.5 million
13 was recorded in net income for the year ended December 31, 2008 from the revaluation of this equity investment which is denominated in $US currency.
The cumulative realized gain on the revaluation of this investment as at December 31, 2008 is $0.3 million which is included in the Bank’s tier 1 capital. A credit risk allocation of $2.5 million is attributable to this investment under the Standardized approach of the Basel II Pillar 1 framework. 9. Interest Rate Risk in the Banking Book Qualitative disclosures The Bank maintains an interest rate risk (IRR) management policy which is approved annually by the Board and senior management. The policy outlines the IRR governance framework, approved risk guidelines, risk measurement and reporting processes, authority and internal controls and exception reporting processes.
IRR management activities are conducted in accordance with corporate standards for risk governance. The Bank’s Board has overall responsibility for IRR management of the Bank. The Board has designated senior officers of the Bank and delegated power to such officers to manage the business and affairs of the Bank. Senior management provides oversight and management through the Treasury Group.
The Treasury Group has day to day responsibility for IRR management and is comprised of members from the local Balance Sheet group, Canada Treasury, Global Treasury, Structured Finance, Finance and Compliance departments. The Treasury Group meets on a monthly basis and receives reports summarizing the Bank’s IRR position relative to risk guidelines. The Treasury Group has responsibility for recommending approval of the policy to senior management and for defining prudent IRR guidelines. Corporate Audit reviews and tests key processes and controls to assure adequacy based upon a rotational risk-based strategy.
Corporate Audit provides independent review and validation of models to ensure they comply with policy. IRR is measured as the potential volatility in the Bank’s net interest income caused by changes in market interest rates. The Bank uses sensitivity analysis and simulations to estimate and manage the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These scenarios incorporate assumptions about balance sheet dynamics, such as loan growth, pricing and changes in funding mix, as well as economic and market conditions. The analysis evaluates how the various scenarios impact net interest income and enables the Bank to continually monitor the balance sheet position in an effort to maintain an acceptable level of exposure to interest rate changes.
Quantitative disclosures The following table shows the potential impact of an immediate and sustained increase or decrease in the market interest rates applicable to the Bank’s rate sensitive assets and liabilities over the next twelve months: (dollars in thousands) As at December 31, 2008 100 basis point increase in interest rates Change in net interest income $ (48,736) Change in net income (69,711) Change in OCI (82) 100 basis point decrease in interest rates Change in net interest income $ 48,875 Change in net income 71,828 Change in OCI 81