eTrade 2001 Annual Report Download - page 102

Our banking operations acquire and manage interest-bearing assets and liabilities in the normal course of business. Interest-bearing
instruments include investment securities, loans, deposits, borrowings and derivative financial instruments. As interest-bearing, these
instruments are subject to changes in market value as interest rates change. Market risk is the potential for adverse decline in market
values. The market values of bank instruments have a direct or indirect impact on Bank earnings, equity and various regulatory
constraints.
Interest Rate Risk
The acquisition, maintenance, and disposition of assets and liabilities are critical elements of the Bank’ s operations. Throughout the
process these instruments are subject to market risk, which is the potential for adverse declines in market values. There are numerous
factors that may influence the speed and direction of changes in market value including, but not limited to, liquidity, the absolute level
of interest rates, the shape of the yield curve,
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and the implied volatility of future interest rate movements. The net market values of bank instruments may direct or indirectly impact
the Bank’ s current or future earnings and is also subject to certain regulatory constraints.
Our Board of Directors delegates responsibility for the day-to-day management of market risk to the Bank’ s Asset Liability
Management Committee. The Asset Liability Management Committee is responsible for measuring, managing and reporting the
Bank’ s aggregate market risk within the policy guidelines and limits established by the Board of Directors. The Bank maintains a Risk
Management Group which is independent of the Bank’ s portfolio management functions to assist the Asset Liability Management
Committee in its responsibilities of measuring and managing market risk.
The market risk profile of the Bank is a net result of the combination of all interest-sensitive assets, liabilities and derivatives. At
December 31, 2001, approximately 86% of the market value of the Bank’ s total assets were comprised of residential mortgages and
mortgaged-backed securities. The values of these assets are sensitive to changes in interest rates as well as expected prepayment levels.
The Bank’ s liability structure consists primarily of transactional deposit relationships such as money market accounts, shorter-term
certificates of deposit, and wholesale collateralized borrowings The derivative portfolio of the Bank is positioned to decrease the
overall market risk resulting from the combination of assets and liabilities. The Bank’ s market risk is discussed and quantified in more
detail in the Gap Analysis and Scenario Analysis sections below.
Most of the Bank’ s assets are generally classified as non-trading portfolios and, as such, are not marked-to-market through earnings for
accounting purposes. The Bank did maintain a trading portfolio of investment-grade securities throughout 2001. The market value of
the trading portfolio at December 31, 2001 was $70.9 million. There were no holdings in the trading account as of September 30,
2000. The trading portfolio at December 31, 2001 was predominantly investment-grade collateralized mortgage obligations and
agency mortgage-backed securities.
Scenario Analysis
Scenario analysis is a more advanced approach to estimating interest rate risk exposure. Under the Net Present Value of Equity
(“NPVE”) approach, the present value of all existing assets, liabilities, derivatives and forward commitment are estimated and then
combined to produce a Net Present Value of Equity figure. The sensitivity of this value to changes in interest rates is then determined
by applying alternative interest rate scenarios, which include, but are not limited to, instantaneous parallel shifts up and down of 100,
200 and 300 basis points. The sensitivity of NPVE as of December 31, 2000 and 2001 and the limits established by the Board of
Directors are listed below:
2002. EDGAR Online, Inc.