US Bank 2008 Annual Report Download - page 50

Each business line within the Company has designated
risk managers. These risk managers are responsible for,
among other things, coordinating the completion of ongoing
risk assessments and ensuring that operational risk
management is integrated into business decision-making
activities. The Company’s internal audit function validates
the system of internal controls through risk-based, regular
and ongoing audit procedures and reports on the
effectiveness of internal controls to executive management
and the Audit Committee of the Board of Directors.
Management also provides various operational risk related
reporting to the Risk Committee of the Board of Directors.
Customer-related business conditions may also increase
operational risk, or the level of operational losses in certain
transaction processing business units, including merchant
processing activities. Ongoing risk monitoring of customer
activities and their financial condition and operational
processes serve to mitigate customer-related operational risk.
Refer to Note 22 of the Notes to Consolidated Financial
Statements for further discussion on merchant processing.
Business continuation and disaster recovery planning is also
critical to effectively managing operational risks. Each
business unit of the Company is required to develop,
maintain and test these plans at least annually to ensure that
recovery activities, if needed, can support mission critical
functions including technology, networks and data centers
supporting customer applications and business operations.
While the Company believes that it has designed
effective methods to minimize operational risks, there is no
absolute assurance that business disruption or operational
losses would not occur in the event of a disaster. On an
ongoing basis, management makes process changes and
investments to enhance its systems of internal controls and
business continuity and disaster recovery plans.
Interest Rate Risk Management In the banking industry,
changes in interest rates are a significant risk that can
impact earnings, market valuations and safety and soundness
of an entity. To minimize the volatility of net interest income
and the market value of assets and liabilities, the Company
manages its exposure to changes in interest rates through
asset and liability management activities within guidelines
established by its Asset Liability Policy Committee
(“ALPC”) and approved by the Board of Directors. The
ALPC has the responsibility for approving and ensuring
compliance with the ALPC management policies, including
interest rate risk exposure. The Company uses net interest
income simulation analysis and market value of equity
modeling for measuring and analyzing consolidated interest
rate risk.
Net Interest Income Simulation Analysis One of the primary
tools used to measure interest rate risk and the effect of
interest rate changes on net interest income is simulation
analysis. The monthly analysis incorporates substantially all
of the Company’s assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance
sheet and assumptions that reflect the current interest rate
environment. Through this simulation, management
estimates the impact on net interest income of a 200 basis
point upward or downward gradual change of market
interest rates over a one-year period. The simulation also
estimates the effect of immediate and sustained parallel
shifts in the yield curve of 50 basis points as well as the
effect of immediate and sustained flattening or steepening of
the yield curve. This simulation includes assumptions about
how the balance sheet is likely to be affected by changes in
loan and deposit growth. Assumptions are made to project
interest rates for new loans and deposits based on historical
analysis, management’s outlook and repricing strategies.
These assumptions are validated on a periodic basis. A
sensitivity analysis is provided for key variables of the
simulation. The results are reviewed by the ALPC monthly
and are used to guide asset/liability management strategies.
The table below summarizes the interest rate risk of net
interest income based on forecasts over the succeeding
12 months. At December 31, 2008, the Company’s overall
interest rate risk position was asset sensitive to changes in
interest rates. The Company manages its interest rate risk
position by holding assets on the balance sheet with desired
interest rate risk characteristics, implementing certain pricing
strategies for loans and deposits and through the selection of
derivatives and various funding and investment portfolio
strategies. The Company manages the overall interest rate
risk profile within policy limits. The ALPC policy limits the
estimated change in net interest income to 4.0 percent of
forecasted net interest income over the succeeding
12 months. At December 31 2008 and 2007, the Company
was within policy.
Market Value of Equity Modeling The Company also utilizes
the market value of equity as a measurement tool in
managing interest rate sensitivity. The market value of equity
measures the degree to which the market values of the
Company’s assets and liabilities and off-balance sheet
48 U.S. BANCORP
SENSITIVITY OF NET INTEREST INCOME
Down 50
Immediate
Up 50
Immediate
Down 200
Gradual*
Up 200
Gradual
Down 50
Immediate
Up 50
Immediate
Down 200
Gradual
Up 200
Gradual
December 31, 2008 December 31, 2007
Net interest income . . . . . . . . . * .37% * 1.05% .54% (1.01)% 1.28% (2.55)%
* Given the current level of interest rates, a downward rate scenario can not be computed.