MARKET AND LIQUIDITY RISK
ASSET AND LIABILITY COMMITTEE
The objective of the Asset and Liability Committee is to ensure that the Bank’s overall asset and liability structure and market risk including liquidity, currency and interest rate risks are managed within the prudential limits and targets delegated by its Board Risk Committee and in accordance with the Guidelines set by the Bank of Mauritius.
On a monthly basis, the Asset and Liability Committee (ALCO) reviews the risk ratios and limits for these areas wherein the Bank has exposure together with sensitivity analysis/stress tests done to monitor impact of potential changes in interest rates or currency movements.
The Bank’s Board Risk Committee delegates the implementation and monitoring of the Bank’s ALCO strategy, policies and procedures to Management ALCO, which is composed of some of the Executive Committee members. ALCO meets at least once monthly to review the ALCO risk ratios, financials and other relevant information.
A sub-committee of the ALCO is the Treasury Committee; the main purpose of which is to monitor on a weekly basis the Bank’s liquidity position and decide on its investment in Government securities and bank placements.
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 risk, 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
- independent 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 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 balance sheet to variations in interest rates. This measurement is calculated for all currencies to which the Group is exposed.
The following observations can be made with regard to the business structural interest rate risk:
- treasury desk mainly redirects 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
- the funding stems mainly from clients’ current accounts, time deposits and saving accounts
- the impact of interest rate fluctuations on the Bank’s Net Interest Income (NII) over a 1 year period is limited. The most significant sensitivities for NII are for a further decrease of MUR rate and an increase in Fed rates. See Note 38(d)(i) for Interest Rate Risk Analysis