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ADMINISTERED
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MATCHED
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EXTENDED |
COMPREHENSIVE |
RISK MANAGEMENT STRUCTURE |
- CEO (+CFO/FM) + Board
- Dealing / settlement segregation (minimum 4 eyes)
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- CEO + CFO (or FM) + Board
- Dealing / settlement segregation (minimum 4 eyes)
- Risk oversight by executive committee / Board ALCO
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- (CEO)/CFO + Treasurer + ALM Management ALCO
- Front Office / Back Office segregation
- Independent risk manager/team in second line, reporting to CRO + Board RiskCo
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- CFO + Treasurer + ALM + Management ALCO + Daily Treasury Committee
- Front + Middle + Back Office segregation
- Fully independent second line reporting to Risk Director (ALM review in second line)
- EWRM capability
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BALANCE SHEET STRUCTURE
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- Commercial (loan book) assets: Minimum 90% on administered rates
- Liabilities: Minimum 90% SDL on administered rates
- Fixed rate lending <=2 years, only if predominantly matched by fixed rate retail deposits of same duration
- Non-administered variable rate (eg base rate/SONIA-linked) lending and funding only if with tracking period limited to <=3 years.
- Internal limits on volume/stock of variable rate tracker assets and liabilities.
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- Commercial assets: A minimum of 50% either on administered rates or due to revert to administered rates in the next 12 months and of that a minimum 40% already on administered rates
- Liabilities: Minimum 50% SDL on administered rates
- Fixed rate lending/funding - max 5 years to reprice date (subject to limits)
- Non-administered variable rate (eg base rate/SONIA-linked) lending and funding - max tracking period 5 years.
- Internal limits on volume/stock of variable rate tracker assets and liabilities.
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- Commercial assets: A minimum of 40% either on administered rates or due to revert to administered rates in the next 12 months, and of that a minimum 25% already on administered rates.
- Liabilities: Minimum 40% SDL on administered rates
- Internal limits on repricing maturity and volume of new lending/funding at fixed rates.
- Internal limits on reversions to variable rate within a period.
- Internal limits on volume/stock of variable rate tracker assets and liabilities.
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- Internal limits controlling level of administered rate assets and liabilities
- Internal limits controlling repricing maturity and volume of new lending/funding at fixed rates
- Internal limits controlling reversions to variable rate within a period.
- Internal limits controlling volume/stock of variable rate tracker assets and liabilities.
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RISK ANALYSIS
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- Matching Report + Static Gap analysis (if any fixed rate lending / funding - (monthly)
- Net interest margin analysis and projection
- Basis risk report.
- MTM of fixed rate liquid assets (at least monthly)
- Forward looking corporate plan (incorporating stress scenario)
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- Matching Report (min monthly) + Static Gap analysis
- Net interest margin analysis and projection
- Basis risk analysis and projection
- Forward looking corporate plan (incorporating interest rate stress scenario)
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- Run-off B/S Gap or VaR / PV01 Analysis (min 2 x monthly)
- NII static / run-off B/S simulation modelling using a range of stressed assumptions (min quarterly)
- Behavioural modelling (prepayment risk)
- Basis risk modelling and projected impact (min 2 years)
- Forward looking corporate plan (incorporating a range of interest rate stress scenarios)
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- Run-off B/S Gap or VaR / PV01 Analysis (min weekly)
- Dynamic balance sheet simulation modelling of NII (incorporating future business flows, optionality) under multiple interest rate stress scenarios and yield curves assumptions
- Structural basis risk modelling (using projected business flows)
- Behavioural modelling (NMDs, prepayments)
- Corporate planning system fully integrated with ALM systems (incorporating ‘what if’ analysis and stress testing)
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TREASURY ANALYSIS SYSTEMS |
- Management accounting system
- Loan/deposit matching capability (if lending/funding at fixed rates)
- Cashflow projection capability.
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- Management accounting system
- Basic ALM IT capable of matching and static/run-off balance sheet modelling
- Cashflow and interest rate basis projection capability
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- ALM system capable of static / run-off balance sheet modelling under dynamic rate conditions
- Optionality modelling capability (particularly to capture prepayment propensity)
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- ALM system capable of projecting forward balance sheet and simulating different interest rate environments, plus measuring embedded optionality, basis risk, etc.
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CURRENCY
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- GBP, EUR, USD only.
- No mismatch
- Min 90%SDL Sterling
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- Multi-currency (subject to policy)
- Minimal FX mismatch (subject to limits)
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INTEREST RATE RISK LIMIT STRUCTURE
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- EV sensitivity limit measured under standard interest rate shock
- NII sensitivity limit (min current and next financial year)
- Minimal gap limits
- Basis risk limits
- Structural risk limits
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- EV and minimum 24 month NII sensitivity limits measured under standard interest rate shock
- Low gap bucket limits (to cover residuals, prepayment and pipeline only)
- Basis risk limits
- Structural risk limits
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- EV & minimum 24 month NII sensitivity limits measured under standard, bespoke and non-parallel rate shock scenarios
- Gap limits (bucket and cumulative)
- Basis risk limits
- Structural risk limits
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- Range of EV and NII sensitivity limits measured under multiple scenarios
- Range of mismatch limits
- Basis risk limits
- Structural risk limits
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INTEREST RATE VIEW
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- Interest rate outlook used for business planning only
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- Interest outlook used for pipeline management and business planning only - No positioning for interest rate view
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- Interest view used to inform business outlook and minimal open positions (subject to risk limits)
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- Interest view used to inform business outlook and strategic/open positions (subject to risk limits)
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HEDGING ACTIVITY
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- Any fixed rate lending matched with fixed rate funding (& vice versa)
- No derivatives
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- Fixed interest rates matched product by product (in tranches)
- Simple derivatives, subject to achieving hedge accounting.
- No structural hedging
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- Natural hedging (of offsetting balance sheet net mismatch positions)
- Net hedging of rate positions using a range of vanilla instruments
- Minimal open positions (subject to limits) for pipeline and residual balances
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- Natural and structural hedging (of balance sheet net mismatch positions)
- Full range of derivative instruments available for hedging
- Open positions (subject to limits)
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FREE CAPITAL HEDGING
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- Earnings / economic value stabilisation on free reserves – duration set as part of strategic review process and amended at other times only with approval of board. No other material position taking in support of an interest rate view
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- Earnings / economic value stabilisation on free reserves – duration set by ALCO/Board. Some position taking in support of an interest rate view subject to agreed limits and appropriate regulatory capital allocation.
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INTEREST RATE INSENSITIVE ASSET & LIABILITY (NMD) HEDGING
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- Behavioural modelling of non-maturity deposits
- NII hedging within limits that balance NII stability benefits against EV risks incurred
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HEDGING INSTRUMENTS
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- Vanilla interest rate swaps
- Vanilla interest rate caps/collars/floors (purchase only)
- FTSE swaps (receive only)
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- Vanilla interest rate swaps
- Vanilla interest rate caps/collars /floors (purchase only)
- Swaptions (purchase only)
- FRAs / Futures (purchase only)
- FTSE swaps (receive only)
- FX swaps/forward contracts (purchase only)
- FX options (purchase only)
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- All market available instruments, subject to compliance with Section 9A of the 1986 Act
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PRICING COMPONENTS
(see Appendix 6 for a glossary of theoretical pricing components, and an additional table linking these to the treasury approaches)
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- Marginal cost of funding
- Liquidity cost overlay
- Operational costs
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- Marginal cost of funding (adjusted for term)
- Liquidity costs
- Hedging costs
- Operational costs
- Minimum return on Capital
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- Cost of core funding (incorporating liquidity, term, optionality, hedging costs)
- Behavioural modelling (prepayment)
- Target return on regulatory capital
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- Pricing system (incorporating liquidity, term, currency, optionality, hedging costs)
- Behavioural modelling (prepayment, non-maturity deposits)
- Credit EL estimates
- Target return on economic capital
- FTP system (optional)
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INTERNAL AUDIT
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- Non-specialist Internal Audit
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- Non-specialist Internal Audit supplemented by outsourced/co-sourced specialist support for Treasury
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- Specialist IT and Treasury Internal Audit resource (may be outsourced or co-sourced)
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- Specialist Treasury systems and controls Internal Audit resource (may be outsourced or co-sourced).
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In this table:
ALCO = Assets and Liabilities Committee
HPIs = house price indices
MTM = mark to market
NII = net interest income
NPV = net present value
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