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AfrAsia Bank Limited and its Group Entities
Annual Report 2015
page 97
MARKET RISK MANAGEMENT
Market Risk Management is an independent risk management function that works in close partnership with the lines of business,
mainly Treasury desk, to identify and monitor market risks throughout the Bank and to define market risk policies and procedures.
The Market Risk function reports to the Bank’s Head of Risk.
Market Risk Management seeks to control risks, facilitate efficient risk/return decisions, reduce volatility in operating performance
and provide transparency into the Bank’s market risk profile for senior management, the Board of Directors and regulators.
Although primary responsibility for managing risk exposure lies with the front office managers, the supervision system is based on
an independent structure, the Market Risk Department of the Risk Division. This Department carries out the following tasks:
establishment of a market risk policy framework;
i
ndependent measurement, monitoring and control of Bank wide market risk;
definition, approval and monitoring of limits;
qualitative risk assessments; and
definition of risk measurement methods, approval of the valuation models used to calculate risks and results.
MARKET RISK
Market risk is the potential for adverse changes in the value of the Bank’s assets and liabilities resulting from changes in market
variables such as interest rates, foreign exchange rates, equity prices or commodity prices.
INTEREST RATE RISK
With regards to its commercial activities, AfrAsia Bank Limited is exposed to rate fluctuations in several currencies.
This structural interest rate risk arises mainly from the residual gaps (surplus or deficit) of the Money Market & Fixed Income Desk
fixed-rate forecasted positions.
AfrAsia Bank Limited uses several indicators to measure its interest rate risk. The three most important indicators are:
interest rate gap analysis (the difference between outstanding fixed-rate assets and liabilities by maturity): the schedule of fixed
rate positions is the main indicator for assessing the characteristics of the hedging operations required. It is calculated on a
static basis;
the net interest income sensitivity to variations in interest rates in various stress scenarios over a 1-year rolling horizon; and
the economic value sensitivity is a supplementary and synthetic indicator. It is calculated as the sensitivity of the economic value
of the statement of financial position to variations in interest rates. This measurement is calculated for all currencies to which
the Group and the Bank are exposed.
The following observations can be made with regards to the business structural interest rate risk:
treasury redirects mainly the funds into Government securities, Nostro, banks placements and margin accounts and invests a
non-significant part into corporate bonds. Loans granted to clients represent almost one third of Interest-Bearing Asset;