Bank of America 2013 Annual Report Download - page 111

Bank of America 2013 109
Interest Rate Risk Management for Nontrading
Activities
The following discussion presents net interest income excluding
the impact of trading-related activities.
Interest rate risk represents the most significant market risk
exposure to our nontrading balance sheet. Interest rate risk is
measured as the potential change in net interest income caused
by movements in market interest rates. Client-facing activities,
primarily lending and deposit-taking, create interest rate sensitive
positions on our balance sheet.
We prepare forward-looking forecasts of net interest income.
The baseline forecast takes into consideration expected future
business growth, ALM positioning and the direction of interest rate
movements as implied by the market-based forward curve. We
then measure and evaluate the impact that alternative interest
rate scenarios have on the baseline forecast in order to assess
interest rate sensitivity under varied conditions. The net interest
income forecast is frequently updated for changing assumptions
and differing outlooks based on economic trends, market
conditions and business strategies. Thus, we continually monitor
our balance sheet position in an effort to maintain an acceptable
level of exposure to interest rate changes.
The interest rate scenarios that we analyze incorporate balance
sheet assumptions such as loan and deposit growth and pricing,
changes in funding mix, product repricing and maturity
characteristics. Our overall goal is to manage interest rate risk so
that movements in interest rates do not significantly adversely
affect earnings and capital.
Table 68 presents the spot and 12-month forward rates used
in our baseline forecasts at December 31, 2013 and 2012.
Table 68 Forward Rates
December 31, 2013
Federal
Funds
Three-
Month
LIBOR
10-Year
Swap
Spot rates 0.25% 0.25% 3.09%
12-month forward rates 0.25 0.43 3.52
December 31, 2012
Spot rates 0.25% 0.31% 1.84%
12-month forward rates 0.25 0.37 2.10
Table 69 shows the pre-tax dollar impact to forecasted net
interest income over the next 12 months from December 31, 2013
and 2012, resulting from instantaneous parallel and non-parallel
shocks to the market-based forward curve. Periodically, we
evaluate the scenarios presented to ensure that they are
meaningful in the context of the current rate environment. For
further discussion of net interest income excluding the impact of
trading-related activities, see page 30.
During 2013, the 10-year Treasury rate increased more than
120 bps. We continue to be asset sensitive to both a parallel move
in interest rates and to a lesser degree a long-end led steepening
of the yield curve. Additionally, rising interest rates impact the fair
value of debt securities and, accordingly, for debt securities
classified as AFS, may adversely affect accumulated OCI and thus
capital levels.
Table 69 Estimated Net Interest Income Excluding
Trading-related Net Interest Income
(Dollars in millions) Short
Rate (bps)
Long
Rate (bps)
December 31
Curve Change 2013 2012
Parallel Shifts
+100 bps
instantaneous shift +100 +100 $ 3,229 $ 4,350
-50 bps
instantaneous shift -50 -50 (1,616) (2,322)
Flatteners
Short end
instantaneous change +100 — 2,210 2,130
Long end
instantaneous change — -50 (641) (1,669)
Steepeners
Short end
instantaneous change -50 — (937) (648)
Long end
instantaneous change — +100 1,066 2,238
The sensitivity analysis in Table 69 assumes that we take no
action in response to these rate shocks. As part of our ALM
activities, we use securities, residential mortgages, and interest
rate and foreign exchange derivatives in managing interest rate
sensitivity.