Charles Schwab 2015 Annual Report Download - page 73

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THE CHARLES SCHWAB CORPORATION
- 53 -
magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies,
including changes in asset and liability mix.
If the Company’s guidelines for its net interest revenue sensitivity are breached, management must report the breach to the
Company’s Corporate Asset-Liability Management and Pricing Committee and establish a plan to address the interest rate
risk. This plan could include, but is not limited to, rebalancing certain investment portfolios or using derivative instruments to
mitigate the interest rate risk. Depending on the severity and expected duration of the breach, as well as the then current
interest rate environment, the plan could also be to take no action. Any plan that recommends taking action is required to be
approved by the Company’s Corporate Asset-Liability Management and Pricing Committee. There were no breaches of the
Company’s net interest revenue sensitivity guidelines during the years ended December 31, 2015 or 2014.
As represented by the simulations presented below, the Company’s investment strategy is structured to produce an increase in
net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall.
The simulations in the following table assume that the asset and liability structure of the consolidated balance sheet would
not be changed as a result of the simulated changes in interest rates. As the Company actively manages its consolidated
balance sheet and interest rate exposure, in all likelihood the Company would take steps to manage any additional interest
rate exposure that could result from changes in the interest rate environment. The following table shows the simulated net
interest revenue change over the next 12 months beginning December 31, 2015 and 2014 of a gradual 100 basis point
increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period.
December 31, 2015 2014
Increase of 100 basis points 8.2 % 11.8 %
Decrease of 100 basis points (9.5) % (4.9)%
The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2015 remained at low levels despite
the increase in federal funds target range to .25% to .50% as directed by the Federal Open Markets Committee in December
2015. The current low interest rate environment limits the extent to which the Company can reduce interest expense paid on
funding sources. A decline in interest rates could negatively impact the yield on the Company’s investment portfolio to a
greater degree than any offsetting reduction in interest expense, further compressing net interest margin. Any increases in
short-term interest rates result in a greater impact as yields on interest-earning assets are expected to rise faster than the cost
of funding sources.