US Bank 2005 Annual Report Download - page 46

The Company manages operational risk through a risk Interest Rate Risk Management In the banking industry,
management framework and its internal control processes. changes in interest rates is a significant risk that can impact
Within this framework, the Corporate Risk Committee earnings, market valuations and safety and soundness of an
(‘‘Risk Committee’’) provides oversight and assesses the entity. To minimize the volatility of net interest income and
most significant operational risks facing the Company of the market value of assets and liabilities, the Company
within its business lines. Under the guidance of the Risk manages its exposure to changes in interest rates through
Committee, enterprise risk management personnel establish asset and liability management activities within guidelines
policies and interact with business lines to monitor established by its Asset Liability Policy Committee
significant operating risks on a regular basis. Business lines (‘‘ALPC’’) and approved by the Board of Directors. ALPC
have direct and primary responsibility and accountability has the responsibility for approving and ensuring
for identifying, controlling, and monitoring operational risks compliance with ALPC management policies, including
embedded in their business activities. Business managers interest rate risk exposure. The Company uses Net Interest
maintain a system of controls with the objective of Income Simulation Analysis and Market Value of Equity
providing proper transaction authorization and execution, Modeling for measuring and analyzing consolidated interest
proper system operations, safeguarding of assets from rate risk.
misuse or theft, and ensuring the reliability of financial and Net Interest Income Simulation Analysis One of the
other data. Business managers ensure that the controls are primary tools used to measure interest rate risk and the
appropriate and are implemented as designed. effect of interest rate changes on rate sensitive income and
Each business line within the Company has designated net interest income is simulation analysis. The monthly
risk managers. These risk managers are responsible for, analysis incorporates substantially all of the Company’s
among other things, coordinating the completion of ongoing assets and liabilities and off-balance sheet instruments,
risk assessments and ensuring that operational risk together with forecasted changes in the balance sheet and
management is integrated into business decision-making assumptions that reflect the current interest rate
activities. Business continuation and disaster recovery environment. Through these simulations, management
planning is also critical to effectively manage operational estimates the impact on interest rate sensitive income of a
risks. Each business unit of the Company is required to 300 basis point upward or downward gradual change of
develop, maintain and test these plans at least annually to market interest rates over a one-year period. The
ensure that recovery activities, if needed, can support simulations also estimate the effect of immediate and
mission critical functions including technology, networks sustained parallel shifts in the yield curve of 50 basis points
and data centers supporting customer applications and as well as the effect of immediate and sustained flattening
business operations. The Company’s internal audit function or steepening of the yield curve. These simulations include
validates the system of internal controls through risk-based, assumptions about how the balance sheet is likely to be
regular and ongoing audit procedures and reports on the affected by changes in loan and deposit growth.
effectiveness of internal controls to executive management Assumptions are made to project interest rates for new
and the Audit Committee of the Board of Directors. loans and deposits based on historical analysis,
Customer-related business conditions may also increase management’s outlook and repricing strategies. These
operational risk or the level of operational losses in certain assumptions are validated on a periodic basis. A sensitivity
transaction processing business units, including merchant analysis is provided for key variables of the simulation. The
processing activities. Ongoing risk monitoring of customer results are reviewed by ALPC monthly and are used to
activities and their financial condition and operational guide asset/liability management strategies.
processes serve to mitigate customer-related operational The table on page 45 summarizes the interest rate risk
risk. Refer to Note 23 of the Notes to Consolidated of net interest income and rate sensitive income based on
Financial Statements for further discussion on merchant forecasts over the succeeding 12 months. At December 31,
processing. 2005, the Company’s overall interest rate risk position was
While the Company believes that it has designed liability sensitive to changes in interest rates. Rate sensitive
effective methods to minimize operational risks, there is no income includes net interest income as well as other income
absolute assurance that business disruption or operational items that are sensitive to interest rates, including asset
losses would not occur in the event of a disaster. On an management fees, mortgage banking and the impact from
ongoing basis, management makes process changes and compensating deposit balances. The Company manages its
investments to enhance its systems of internal controls and interest rate risk position by holding assets on the balance
business continuity and disaster recovery plans. sheet with desired interest rate risk characteristics,
implementing certain pricing strategies for loans and
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