Market risk management
Interest Rate Risk Management
To achieve the objective of protecting the Bank from changes in market interest rates, the Bank matches the sensitivity of its assets and liabilities. The Bank’s strategy for implementing the desired matching is to divide the balance sheet into the two broad types of interest rate sensitive assets and liabilities (floating rate and fixed rate) and to align the interest rate profiles of each balance sheet component to the appropriate benchmark.
Currency Risk Management
The agreement establishing the Bank explicitly prohibits it from taking direct currency exchange exposures by requiring liabilities in any one currency (after swap activities) to be matched with assets in the same currency. As the Bank’s net assets are denominated in Units of Account (UA), which are equivalent to the SDR, the Bank has a net asset position that is potentially exposed to translation risk when currency exchange rates fluctuate. The Bank seeks to minimize potential fluctuation of the value of its net worth in UA by matching to the extent possible the currency composition of its net assets with the currency basket of the SDR.
Liquidity Risk Management
As a long-term development lender, the Bank holds sufficient liquid assets to enable it continue normal operations even in the unlikely event that it is unable to obtain fresh resources from the capital markets for an extended period of time. The Bank’s policy requires maintaining a prudential minimum of liquidity based on projected net loan transfers, contingent liabilities and debt service payments. Equally, the Bank’s policy permits the increase of liquid resources up to an operating level based on the minimum in addition to taking into account undisbursed and irrevocable commitments to take advantage of low cost funding opportunities as they arise.
The report reviews the Bank’s market risk management objectives and the strategies employed by the Bank to achieve these objectives. It also assesses the effectiveness of these strategies over the past year highlighting areas where management feels that further refinements can be achieved.