Charles Schwab 2013 Annual Report Download - page 60

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THE CHARLES SCHWAB CORPORATION
- 49 -
minimize the number of variables and to better isolate risks. The simulations involve assumptions that are inherently
uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact of changes in interest rates on
net interest revenue. Actual results may differ from simulated results due to balance growth or decline and the timing,
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 (Corporate ALCO) 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 ALCO. There were no breaches of the Company’s net interest
revenue sensitivity guidelines during the years ending December 31, 2013 or 2012.
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 results of a
gradual 100 basis point increase or decrease in market interest rates relative to the Company’s current market rates forecast
on simulated net interest revenue over the next 12 months beginning December 31, 2013 and 2012.
December 31, 2013 2012
Increase of 100 basis points 11.0 % 19.2 %
Decrease of 100 basis points (4.5) % (10.0)%
The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2013 remained at historically low
levels, including the federal funds target rate, which was unchanged at a range of zero to 0.25%. The year-over-year decrease
in net interest income sensitivity reflects the baseline assumption of higher medium and longer-term rates at December
31, 2013 relative to those assumed at December 31, 2012 resulting in a higher basis for comparison. The current low interest
rate environment limits the extent to which the Company can reduce interest expense paid on funding sources in a declining
interest rate scenario. A decline in interest rates could therefore 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.