US Bank 2003 Annual Report Download - page 47

the Company’s objectives. In the event of a breakdown in While the Company believes that it has designed
the internal control system, improper operation of systems effective methods to minimize operational risks, there is no
or improper employees’ actions, the Company could suffer absolute assurance that business disruption or operational
financial loss, face regulatory action and suffer damage to losses would not occur in the event of a disaster. On an
its reputation. ongoing basis, management makes process changes and
The Company manages operational risk through a risk investments to enhance its systems of internal controls and
management framework and its internal control processes. business continuity and disaster recovery plans.
The framework involves the business lines, corporate risk Interest Rate Risk Management In the banking industry, a
management personnel and executive management. Under significant risk exists related to changes in interest rates. To
this framework, business lines have direct and primary minimize the volatility of net interest income and of the
responsibility and accountability for identifying, controlling, market value of assets and liabilities, the Company manages
and monitoring operational risk. Clear structures and its exposure to changes in interest rates through asset and
processes with defined responsibilities are in place. Business liability management activities within guidelines established
managers maintain a system of controls with the objective by its Asset Liability Policy Committee (‘‘ALPC’’) and
of providing proper transaction authorization and approved by the Board of Directors. ALPC has the
execution, proper system operations, safeguarding of assets responsibility for approving and ensuring compliance with
from misuse or theft, and ensuring the reliability of financial ALPC management policies, including interest rate risk
and other data. Business managers ensure that the controls exposure. The Company uses Net Interest Income
are appropriate and are implemented as designed. Simulation Analysis and Market Value of Equity Modeling
Each business line within the Company has designated for measuring and analyzing consolidated interest rate risk.
risk managers. These risk managers are responsible, among
Net Interest Income Simulation Analysis One of the
other things, for coordinating the completion of ongoing
primary tools used to measure interest rate risk and the
risk assessments and ensuring that operational risk
effect of interest rate changes on rate sensitive income and
management is integrated into business decision-making
net interest income is simulation analysis. The monthly
activities. Business continuation and disaster recovery
analysis incorporates substantially all of the Company’s
planning is also critical to effectively manage operational
assets and liabilities and off-balance sheet instruments,
risks. Each business unit of the Company is required to
together with forecasted changes in the balance sheet and
develop, maintain and test these plans at least annually to
assumptions that reflect the current interest rate
ensure that recovery activities, if needed, can support
environment. Through these simulations, management
mission critical functions including technology, networks
estimates the impact on interest rate sensitive income of a
and data centers supporting customer applications and
300 basis point upward or downward gradual change of
business operations. The Company’s internal audit function
market interest rates over a one-year period. The
validates the system of internal controls through risk-based,
simulations also estimate the effect of immediate and
regular and ongoing audit procedures and reports on the
sustained parallel shifts in the yield curve of 50 basis points
effectiveness of internal controls to executive management
as well as the effect of immediate and sustained flattening
and the Audit Committee of the Board of Directors.
or steepening of the yield curve. These simulations include
Customer-related business conditions may also increase
assumptions about how the balance sheet is likely to be
operational risk or the level of operational losses in certain
affected by changes in loan and deposit growth.
transaction processing business units, including merchant
Assumptions are made to project interest rates for new
processing activities. Ongoing risk monitoring of customer
loans and deposits based on historical analysis,
activities and their financial condition and operational
management’s outlook and repricing strategies. These
processes serve to mitigate customer-related operational
assumptions are validated on a periodic basis. A sensitivity
risk. Refer to Note 23 of the Notes to Consolidated
analysis is provided for key variables of the simulation. The
Financial Statements for further discussion on merchant
results are reviewed by ALPC monthly and are used to
processing.
Sensitivity of Net Interest Income and Rate Sensitive Income:
December 31, 2003 December 31, 2002
Down 50 Up 50 Down 300 Up 300 Down 50 Up 50 Down 300 Up 300
Immediate Immediate Gradual Gradual Immediate Immediate Gradual Gradual
Net interest income ************** 1.30% .19% *% (.02)% .08% (.34)% *% (1.91)%
Rate sensitive income ************ .74% .01% *% (.54)% .20% (.55)% *% (2.57)%
* Given the current level of interest rates, a downward 300 basis point scenario can not be computed.
U.S. Bancorp 45