US Bank 2002 Annual Report Download - page 47

and monitoring operational risk. Clear structures and Simulation Analysis and Market Value of Equity Modeling
processes with defined responsibilities are in place. Business for measuring and analyzing consolidated interest rate risk.
managers maintain a system of controls with the objective Net Interest Income Simulation Analysis One of the
of providing proper transaction authorization and primary tools used to measure interest rate risk and the
execution, proper system operations, safeguarding of assets effect of interest rate changes on rate sensitive income and
from misuse or theft, and ensuring the reliability of financial net interest income is simulation analysis. The monthly
and other data. Business managers ensure that the controls analysis incorporates substantially all of the Company’s
are appropriate and are implemented as designed. assets and liabilities and off-balance sheet instruments,
Each business line within the Company has designated together with forecasted changes in the balance sheet and
risk managers. These risk managers are responsible, among assumptions that reflect the current interest rate
other things, for coordinating the completion of ongoing environment. Through these simulations, management
risk assessments and ensuring that operational risk estimates the impact on rate sensitive income of a 300 basis
management is integrated into business decision-making point upward or downward gradual change of market
activities. Business continuation and disaster recovery interest rates over a one year period. The simulations also
planning is also critical to effectively manage operational estimate the effect of immediate and sustained parallel shifts
risks. Each mission critical business unit is required to in the yield curve of 50 basis points as well as the effect of
develop, maintain and test these plans at least annually to immediate and sustained flattening or steepening of the
ensure that recovery activities, if needed, can support yield curve. These simulations include assumptions about
mission critical functions including technology, networks how the balance sheet is likely to be affected by changes in
and data centers supporting customer applications and loan and deposit growth. Assumptions are made to project
business operations. The Company’s internal audit function rates for new loans and deposits based on historical
validates the system of internal controls through risk-based, analysis, management’s outlook and repricing strategies.
regular and ongoing audit procedures and reports on the These assumptions are validated on a periodic basis. A
effectiveness of internal controls to executive management sensitivity analysis is provided for key variables of the
and the Audit Committee of the Board of Directors. simulation. The results are reviewed by ALPC monthly and
While the Company believes that it has designed are used to guide hedging strategies. ALPC policy guidelines
effective methods to minimize operational risks, there is no limit the estimated change in rate sensitive income to
absolute assurance that business disruption or operational 5.0 percent of forecasted rate sensitive income over the
losses would not occur in the event of a disaster. succeeding 12 months.
Interest Rate Risk Management In the banking industry, a The table below summarizes the interest rate risk of
significant risk exists related to changes in interest rates. To net interest income and rate sensitive income. The interest
minimize the volatility of net interest income and of the rate risk position of the Company was more liability
market value of assets and liabilities, the Company manages sensitive at December 31, 2002, than at December 31,
its exposure to changes in interest rates through asset and 2001. The change in the rate risk position is primarily due
liability management activities within guidelines established to higher levels of fixed rate investment portfolio securities
by its Asset Liability Policy Committee (‘‘ALPC’’) and despite the gradual portfolio mix shift toward floating
approved by the Board of Directors. ALPC has the rate securities. The rate risk position of these assets is
responsibility for approving and ensuring compliance with partially offset by higher levels of demand deposits. At
asset/liability management policies, including interest rate December 31, 2002 and 2001, the Company was well
risk exposure. The Company uses Net Interest Income within its policy guidelines.
Sensitivity of Net Interest Income and Rate Sensitive Income:
2002 2001
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 ************** .08% (.34)% * % (1.91)% (.10)% (.15)% * % .10%
Rate Sensitive Income *********** .20% (.55)% * % (2.57)% .24% (.38)% * % (.46)%
* Given the current level of interest rates, a downward 300 basis point scenario can not be computed.
U.S. Bancorp 45