Page 220 - ACCESS BANK ANNUAL REPORTS_eBook

viz. Liquidity Gap Analysis, Dynamic Cash Flow Analysis, Li- • Liquidity gap analysis
quidity Ratios, Value at Risk (VaR), Earnings at Risk (EaR) and • Earnings-at-Risk (EAR) using various interest rate
Sensitivity Analysis. The primary aim of these processes is forecasts
risk forecasting and impact mitigation through manage- • Sensitivity Analysis
ment action and portfolio rebalancing.

The risk reporting mechanism in the Bank comprises dis- INTEREST RATE RISK
closures and reporting to the various management com- Interest rate risk is the exposure of the Bank’s financial con-
mittees viz. Enterprise Risk Management Committee, dition to adverse movements in interest rates, yield curves
Asset and Liability Committee and the Board Risk Manage- and credit spreads. The Bank is exposed to interest rate risk
ment Committee. The Risk Committees receive daily and through the interest bearing assets and liabilities in its trad-
weekly risk dashboard and monthly and quarterly reports ing and banking books.
which are presented at the committee meetings. Depend-
ing on the market conditions and risk outlook, recommen- re-PrICINg aND LIquIDIty gaP aNaLySIS
dations are made to the risk management committees in
respect of the market risk profile, risk appetite appraisal; as Access Bank’s objective for management of interest rate
well as review of limits against actual position. risk in the banking book is to ensure a higher degree of in-
terest rate mismatch margin stability and lower interest rate
The Bank regularly conducts stress testing to monitor its risk over an interest rate cycle. This is achieved by hedging
vulnerability to unfavorable shocks. It monitors and controls material exposures with the external market.
its risk, using various internal and regulatory risk limits for
trading book and banking book which are set according to The Bank’s operations are subject to the risk of interest rate
a number of criteria including economic scenario, business fluctuations to the extent that interest-earning assets and
strategy, management experience, peer analysis and the interest-bearing liabilities mature or re-price at different
Bank’s risk appetite. times or in differing amounts. In the case of floating rated
assets and liabilities, the Bank is exposed to basis risk, which
In line with the CBN’s circular on new capital adequacy is the difference in re-pricing characteristics of the various
framework, Access Bank has adopted the standardised ap- floating rate indices, such as the savings rate and 90-day
proach for market risk which is used in the annual computa- NIBOR and different types of interest.
tion of the Internal Capital Adequacy Assessment Process
(ICAAP) which involves the identification, measurement Non-traded interest rate risk arises in the banking book
and assessment of all material risks and resultant capital from the provision of retail and wholesale (non-traded)
requirements. banking products and services, as well as from certain
structural exposures within the Groups balance sheet,
Also, the Bank has put in place, a detailed plan for the full im- mainly due to re-pricing timing differences between assets,
plementation for the Basel II & III frameworks. A road map liabilities and equities. These risks impact both the earnings
for the migration to more advanced capital computation and the economic value of the Group. Overall non-trading
method which factors in the actual loss experience of the interest rate risk positions are managed by Treasury, which
Bank has also been drawn up and is being implemented. uses investment securities, advances to banks and depos-
its from banks to manage the overall position arising from
NON-traDINg POrtFOLIO the Group’s non-trading activities.
The principal objective of market risk management of
non-trading portfolios is to optimize net interest income. earNINgS-at-rISK (ear) aPPrOaCH
Due to the size of the Bank’s holdings in rate-sensitive as-
sets and liabilities, a major area of market risk exposures The principal tool used to measure and control market risk
in the Bank is the interest rate on the banking book. This exposure within the Group’s trading portfolios is the open
risk arises from the mismatch between the future yield on position limits using the Earnings at Risk approach. Spec-
assets and their funding cost, as a result of interest rate ified limits have been set for open positions limits, which
changes. The Bank uses a variety of tools to track and man- are the expected maximum exposure the Group is to be
age this risk: exposed to. Risk management activities are aimed at opti-
mizing net interest income, given market interest rate levels
• Re-pricing gap analysis (which allows the Bank consistent with the Bank’s business strategies.
to maintain a positive or negative gap depending
upon the forecast of interest rate position). The Interest-rate risk is monitored centrally with a Gap report. A
size of the gap is then adjusted to either hedge limits framework is in place to ensure that retained risk re-
net interest income against changing interest mains within approved appetite. Interest rate risk also aris-
rates or to speculatively increase net interest es in the treasuries of the Bank’s African subsidiaries in the
income course of balance sheet management and facilitation of

220 Access BAnk Plc
Annual Report & Accounts 2017