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 and non-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 simulated interest rate scenarios and standard parallel and non-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 supplemented by simulated VaR for economic value of CWB’s equity, estimated by applying simulated interest rate scenarios to interest 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. Interest Rate Sensitivity The following table outlines the potential before-tax impact of an immediate and sustained 100 basis point increase or decrease in interest rates on our EVE and net interest income (NII). Table 27 – Structural Interest Rate Sensitivity Measures ($ thousands)
October 31, 2023
October 31, 2022
Before-tax impact associated with: 100 basis point increase in rates 100 basis point decrease in rates
EVE Sensitivity
NII Sensitivity ( 1)
EVE Sensitivity
NII Sensitivity (1)
$ $
(54,776)
$ $
7,980
$ $
(86,311)
$ $
1,559
47,674
(9,503)
79,657
(3,429)
(1) Represents the 12-month NII exposure to an immediate and sustained shock in rates.
In addition, a one-percentage point increase in interest rates would decrease OCI $84,514 (October 31, 2022 – $87,691), net of tax and a one-percentage point decrease in interest rates would increase OCI by $87,823 (October 31, 2022 – $90,586), net of tax. Both the year-over-year change in NII and EVE sensitivity reflect a shorter net duration of the structural balance sheet. Both economic value of equity sensitivity and earnings sensitivity remained within limits established by the Board of Directors. The interest rate sensitivities are based on a number of assumptions and factors, which include: a constant structure in the interest sensitive asset and liability portfolios; interest rate changes affecting interest sensitive assets and liabilities by proportionally the same amount, except floor levels for various deposit liabilities and certain floating rate loans, and applied at the appropriate repricing dates; application of behavioural assumptions to indeterminate assets and liabilities; and no early redemptions. The impact on earnings from changes in market interest rates will also 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. 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.
Note 22 of the audited consolidated financial statements provides the static gap position at October 31, 2023 for select time intervals.
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.
CWB Financial Group 2023 Annual Report | 49
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