Ally Bank 2011 Annual Report Download - page 88

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10−K
Fair Value Sensitivity Analysis
The following table and subsequent discussion presents a fair value sensitivity analysis of our assets and liabilities using isolated hypothetical
movements in specific market rates. The analysis assumes adverse instantaneous, parallel shifts in market−exchange rates, interest rate yield curves, and
equity prices. The analysis does not consider the financial offsets available through derivative activities. Additionally, since only adverse fair value impacts
are included, the natural offset between asset and liability rate sensitivities that arise within a diversified balance sheet, such as ours, is not considered.
2011 2010
December 31, ($ in millions) Nontrading Trading Nontrading Trading
Financial instruments exposed to changes in:
Interest rates
Estimated fair value (a) $ 549 (a) $ 240
Effect of 10% adverse change in rates (a) (2) (a) (1)
Foreign−currency exchange rates
Estimated fair value $ 6,724 $ — $ 7,079 $ 94
Effect of 10% adverse change in rates (672) — (708) (9)
Equity prices
Estimated fair value $ 1,059 $ — $ 796 $ —
Effect of 10% decrease in prices (106) — (80) —
(a) Refer to the next section titled Net Interest Income Sensitivity Analysis for information on the interest rate sensitivity of our nontrading financial instruments.
The fair value of our foreign−currency exchange−rate sensitive financial instruments decreased during the year ended December 31, 2011, compared
to 2010, due to increases in our foreign−denominated deposits. This increase consequently drove the decrease in the fair value estimate and associated
adverse 10% change in rates impact. The increase in the fair value of our equity sensitive financial instruments was due to a higher equity investment
balance compared to prior year. This change in equity exposure drove our increased sensitivity to a 10% decrease in equity prices.
Net Interest Income Sensitivity Analysis
We use net interest income sensitivity analysis to measure and manage the interest rate sensitivities of our nontrading financial instruments rather than
the fair value approach. Interest rate risk represents the most significant market risk to the nontrading exposures. We actively monitor the level of exposure
so that movements in interest rates do not adversely affect future earnings. Simulations are used to estimate the impact on our net interest income in
numerous interest rate scenarios. These simulations measure how the interest rate scenarios will impact net interest income on the financial instruments on
the balance sheet including debt securities, loans, deposits, debt, and derivative instruments. The simulations incorporate assumptions about future balance
sheet changes including loan and deposit pricing, changes in funding mix, and asset/liability repricing, prepayments, and contractual maturities.
We prepare forward−looking forecasts of net interest income, which take into consideration anticipated future business growth, asset/liability
positioning, and interest rates based on the implied forward curve. Simulations are used to assess changes in net interest income in multiple interest rates
scenarios relative to the baseline forecast. The changes in net interest income relative to the baseline are defined as the sensitivity. The net interest income
sensitivity tests measure the potential change in our pretax net interest income over the following twelve months. A number of alternative rate scenarios are
tested including immediate parallel shocks to the forward yield curve, nonparallel shocks to the forward yield curve, and stresses to certain term points on
the yield curve in isolation to capture and monitor a number of risk types.
Our twelve−month pretax net interest income sensitivity based on the forward−curve was as follows.
Year ended December 31, ($ in millions) 2011 2010
Parallel rate shifts
−100 basis points $ 73 $ 54
+100 basis points (84) (99)
+200 basis points 88 (28)
Our net interest income was liability sensitive to parallel moves in interest rates of −100 and +100 basis points in both years ended 2011 and 2010. The
positive change in net interest income in the +200 basis interest rate move in 2011 and limited adverse change in 2010 was mainly due to income on certain
commercial loans that have rate index floors. Interest income on these loans increases significantly as interest rates and the related rate index rises above the
level of the floor.
The change in net interest income sensitivity from December 31, 2010 was due to the change in the level of forward short−term interest
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