The duration limits consider an appropriate trade-off between:
• Earnings volatility and volatility in the value of our equity; • Risk and return (e.g. increasing duration increases the exposure to rising interest rates, but also benefits net interest income when there is a positively sloping yield curve); and, • Expected interest rate movements. IRRBB is measured using standard parallel interest rate shocks and historical simulations to evaluate earnings and economic value sensitivity, stress testing and gap analysis, in addition to other traditional risk metrics, including: • Earnings at Risk (EaR) - the potential reduction in net interest income due to adverse interest rate movements over a one-year horizon. • Economic Value of Equity at Risk (EVaR) - the potential reduction in economic value of CWB’s equity due to adverse interest rate movements.
Both EaR and EVaR are measured against stress scenarios historically observed (historical simulation or historical Value at Risk (VaR)) and standard parallel interest shocks (interest rate sensitivity).
IRRBB exposure is controlled by managing the size of the static gap positions between interest sensitive assets and interest sensitive liabilities for future periods. This is supple mented by historical VaR for economic value of CWB’s equity, estimated by applying historical interest rate scenarios to inte rest sensitive assets and interest sensitive liabilities. These analyses are supported by stress testing of the asset liability portfolio structure, duration analysis and dollar estimates of net interest income sensitivity after hedging activity for periods of up to one year. The interest rate gap is measured at least monthly. The Executive Risk Committee and ALCo regularly review internal reporting on the measurement outcomes of IRRBB and hedging strategies, which provide monitoring of EaR and EVaR, in addition to stress testing, gap analysis and other market risk metrics. A summary report is provided to the Board Risk Committee each quarter. Note 22 of the audited consolidated financial statements provides the static gap position at October 31, 2022 for select time intervals and information on the estimated impact of a one-percentage point increase or decrease in interest rates on net interest income and other comprehensive income. The analysis in Note 22 is a static measurement of interest rate sensitivity gaps at a specific point in time, and there is potential for these gaps to change significantly over a short period. The impact on earnings from changes in market interest rates will depend on both the magnitude of and speed with which interest rates change, as well as the size and maturity structure of the cumulative interest rate gap position and the management of those positions over time.
The estimates provided in Note 22 are based on a number of assumptions and factors, which include:
• A constant structure in the interest sensitive asset liability portfolio; • Behavioural assumptions are applied to indeterminate assets and liabilities; • Interest rate changes affecting interest sensitive assets and liabilities by proportionally the same amount and applied at the appropriate repricing dates; and, • No early redemptions.
We maintain an asset liability structure and interest rate sensitivity within our established policies through pricing and product initiatives, as well as the use of interest rate swaps and other appropriate strategies.
FOREIGN EXCHANGE RISK Foreign exchange risk is the risk to changes in earnings or economic value arising from changes in foreign exchange rates. This risk arises when various assets and liabilities are denominated in different currencies.
Risk Management We have established policies that include limits on the maximum allowable differences between U.S. dollar assets and liabilities. We measure the difference daily and manage it through use of U.S. dollar forward contracts or other means. Our Market Risk Management policy includes monitoring of our U.S. dollar liquidity exposures. Deviations from compliance with policy, if any, are reported to ALCo and the Board Risk Committee. In providing financial services to our customers, we have assets and liabilities denominated in U.S. dollars. At October 31, 2022, assets denominated in U.S. dollars were 3% (2021 – 3%) of total assets and U.S. dollar liabilities were 3% (2021 – 3%) of total liabilities. We do not buy or sell currencies other than U.S. dollars other than to meet specific client needs. We have no material exposure to currencies other than U.S. dollars.
52 | CWB Financial Group 2022 Annual Report
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