The Groupís interest rate risk exposures are mainly structural driven. The major types of structural positions are:
repricing risk Ė mismatches in the maturity or repricing periods of assets and liabilities
basis risk Ė different pricing basis for different transactions so that yield on assets and cost of liabilities may change by different amounts within the same repricing period
The Groupís Asset and Liability Management Committee ("ALCOĒ) maintains oversight of interest rate risk and the RC sanctions the interest rate risk management policies formulated by the ALCO. The interest rate risk is identified, measured on a daily basis. The Finance Department closely monitors the related risks and reports to Risk Committee of the Board and ALCO.
Gap analysis is one of the tools used to measure the Groupís exposure to repricing risk. This provides the Group with a static view of the maturity and repricing characteristics of its balance sheet positions. The Group uses interest rate derivatives to hedge its interest rate exposures and in most cases, plain vanilla interest rate swaps are used.
Sensitivities of earnings and economic value to interest rate changes (Earnings at Risk and Economic Value at Risk) are assessed through hypothetical interest rate shock of 200 basis points across the yield curve on both sides. Earnings at Risk and Economic Value at Risk are respectively controlled within an approved percentage of the projected net interest income for the year and the latest capital base as sanctioned by the RC. The results are reported to the ALCO and the RC on a regular basis.
The impact of basis risk is gauged by the projected change in net interest income under scenarios of imperfect correlation in the adjustment of the rates earned and paid on different instruments. Ratios of assets to liabilities with similar pricing basis are established to monitor such risk.
Stress tests on repricing risk and basis risk are conducted regularly. The ALCO monitors the results of stress tests against limits and decides whether remedial action should be made.