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Market risk is defined as the risk of loss arising from an adverse change in the market value (or prices) of financial instruments.
−Removed: A significant component of market risk is interest rate risk, which is inherent in our lending, investment,
−Removed: borrowing, and deposit gathering activities.
+Added: A significant component of market risk is interest rate risk, which is inherent in our lending, investment, borrowing, and deposit gathering activities.
The Bank manages interest rate sensitivity to minimize the exposure of our net interest margin, earnings, and capital to changes in interest rates.
Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing, or maturity of assets or liabilities.
−Removed: Interest rate changes can also affect the market value of our financial instruments, such as available-for-sale securities and the related unrealized gains or losses, which affects our equity value.
+Added: Interest rate changes can also affect the market value of our financial instruments, such as available-for-sale securities and the related unrealized gains or losses, which affect our equity value.
To mitigate interest rate risk, the structure of our assets and liabilities is managed with the objective of correlating the effects of interest rate changes on loans and investments with those of deposits and borrowings.
−Removed: The asset liability management policy sets limits on the acceptable amount of change to net interest income and economic value of equity in different interest rate environments.
−Removed: From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates.
+Added: The Asset/Liability Management Policy sets limits on the acceptable amount of change to net interest income and the economic value of equity in different interest rate environments.
+Added: From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of selected investment securities and specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates.
Refer to Note 14 to the Consolidated Financial Statements in ITEM 8 of this report.
ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly.
−Removed: We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability.
−Removed: A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs.
+Added: We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability in the context of policy guidelines.
+Added: A simplified statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs.
If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions.
−Removed: At December 31, 2022, interest rate risk was within policy guidelines established by ALCO and the Board.
+Added: Governing policies are subject to review by regulators and are updated to incorporate their observations and adapt to changes in idiosyncratic and systemic risks.
+Added: As of December 31, 2023, interest rate risk was within the policy guidelines established by ALCO and the Board.
One set of interest rates modeled and evaluated against flat interest rates and a static balance sheet is a series of immediate parallel shifts in the yield curve.
Our most recent analysis of our interest rate sensitivity is provided in the following table as an example rather than an expectation of likely interest rate movements.
−Removed: Effect of Interest Rate Change on Net Interest Income (NII)
−Removed: Immediate Changes in Interest Rates (in basis points) Estimated Change in NII in Year 1 (as percent of NII) Estimated Change in NII in Year 2 (as percent of NII)
+Added: Immediate Changes in Interest Rates (in basis points) Estimated Change in Net Interest Income in Year 1, as Percent of Net Interest Income
+Added: Estimated Change in Net Interest Income in Year 2, as Percent of Net Interest Income
up 400 (10.8) % 0.7 %
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down 200 2.5 % 0.9 %
+Added: down 300 4.4 % 2.6 %
+Added: down 400 7.0 % 4.6 %
Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities.
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As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions.
−Removed: For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing those deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates.
+Added: For example, lower deposit growth than modeled may cause the Bank to increase its borrowing position, thereby increasing its liability sensitivity.
Additionally, assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements.
Important deposit modeling assumptions include the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change, otherwise known as the deposit beta.
−Removed: We applied a n average deposit beta of 35% to rates paid on non-maturity interest-bearing deposits in rising rate scenarios, reflected in the table above.
−Removed: The actual rates and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied in the various scenarios.
+Added: The above tables reflect deposit betas of up to 68%, averaging 40%, to rates paid on non-maturity interest-bearing deposits in rising rate scenarios and deposit betas of up to 60%, averaging 34%, to rates paid on non-maturity interest-bearing deposits in falling rate scenarios.
+Added: The actual rates
+Added: and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied in the various scenarios.
Lastly, uneven changes in different tenors of U.S.
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.