Other Scenarios - Concentration Risk and Business Continuity for a Banking Sector

              Other Scenarios - Concentration Risk and Business Continuity for a Banking Sector

PART: 18

11.4.4. Concentration Risk

The Bank’s general policy is to limit exposures to counter-parties to less than 13% of the adjusted capital base with most being less than 9%.  By doing so it limits the possibility of experiencing a large loss impairing the capital base. At present, there is only one exposure which exceeds 12% and there are only four others exceeding 7%. These are all closely monitored.  The aggregate of exposures exceeding 8% of ABCD is limited to 300% of ABCD.  As at 7th December 2000 the aggregate of these large exposure was 34.5% of ABCD.

11.4.5. Business Continuity

The Bank has a rehearsed Business Continuity Plan utilising its own back-up facilities at the ABC branch.  The most recent Business Continuity exercise took place in October 2000 and was successful. Additionally desktop tests will be undertaken at least twice a year.

Other Scenarios - Liquidity Stress (also see ILAA) Sample for a Banking Sector

                         Other Scenarios - Liquidity Stress (also see ILAA) Sample for a Banking Sector

PART: 17

11.4.3. Liquidity Stress (also see ILAA)

The Banks Treasury area conducts regular, monthly deposit stress tests for several scenarios. The Bank assumes a 30% withdrawal of resident and 10% withdrawal of non-resident deposits instantly. Each half-year and when required by ICAAP a “doomsday” stress test is conducted, whereby 40% of resident and non-resident deposits are deemed to have been withdrawn.

At the time of writing, and with the exception of EURO, the Bank experiences a surplus of the main currencies (Dolar and Euro) within the boundaries of both types of test in these scenarios.

As a measure of comfort during stress times, the group Chairman has confirmed that group companies (sister / parent) will  buy back the outstanding non-resident corporate loans and/or bills in the portfolio to improve liquidity.

The Bank will be increasing its borrowing prospects, in times of crisis, by purchasing USA Gilts with maturities up to 10 years and maintaining an adequate balance on its Bank of Brazil reserve account.

The Bank may also consider using the option to convert part of its capital into EURO to support the assets denominated in EURO, if the market stresses make it difficult to find swap counterparties. The parent Bank has already expressed its agreement to do this.

Other Scenarios - Stresses in the Loan Portfolio Sample for a Banking Sector

                         Other Scenarios - Stresses in the Loan Portfolio Sample for a Banking Sector

PART: 17

11.4.2. Stresses in the Loan Portfolio.

As at end 2000 just over 43% of the Bank’s loan portfolio is secured; most of this (76%) is by property in the USA, almost all of which is located in New York. Therefore the Bank is exposed to further stresses that may arise in the New York Area property market.  The Bank has a conservative attitude to risk and has calculated that the property market would need to fall by 15% before any exposures would exceed 100% of valuation.  The excess exposure in this case would be approx $225,300 if all cases defaulted and the Bank estimates the likelihood of this to be low. (If the property market fell by 30% the excess would be $2.08m and by 42% by $5.3m.)

In 2002, loans to residents are planned to grow to $47m of which at least 80% is to be secured on property in the USA with loan to value ratio of not more than 50%. Assuming there is a 30% drop in property values up to half the portfolio could be non-performing, and in these circumstances, the likely shortfall could be about $1.5m.  In addition, the Bank may experience interest loss on part of the portfolio. As an illustration of the possible impact on the revenue stream of the Bank an amount of $1.5m. bearing an interest rate of 4.5% p.a. equates to $237,500. Taking these figures together this would be in total 6% of the planned capital base.  However, the Bank estimates the probability of this happening to be low.

Other Scenarios - Variation in Interest and Exchange Rates Sample for a Banking Sector

          Other Scenarios - Variation in Interest and Exchange Rates Sample for a Banking Sector

PART: 16

 11.4. Other Scenarios

 11.4.1. Variation in Interest and Exchange Rates

11.4.1.1 .In the ordinary course of business, the Bank does not have a large exposure to movements in exchange rates unless they are connected to changes in interest rates.  If losses are experienced in foreign currency assets then an exposure would arise.  Should the Bank experience losses in foreign currency assets, any provisions necessary to cover those losses would always be held in the asset currency.  Any loss, if realised, would be  converted to the base currency, EURO, thus closing out any exchange exposure.

11.4.1.2. The exposure to interest rate movements has been partly mitigated by the move to purchase floating rate assets but some fixed rate paper remains which could create an interest rate risk. However, with the current global economic climate, and the expectation that central bank interest rates will be kept at constant low levels at least until the end of 2001, the current level of fixed rate assets should not cause much threat regarding interest income risk.

11.4.1.3. The prospect of higher inflation should indicate significantly higher interest rates before the end of the Plan period but this does not seem likely in the near future particularly as the so called austerity measures growth introduced by the present Coalition Government have yet to bite.