Bank of America 2015 Annual Report Download - page 97

0
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greater than -100 -100 to -75 -75 to -50 -50 to -25 -25 to 0 0 to 25 25 to 50 50 to 75 75 to 100 greater than 100
Number of Days
Revenue (dollars in millions)
Histogram of Daily Trading-related Revenue
Year Ended December 31, 2014 Year Ended December 31, 2015
Bank of America 2015 95
Interest Rate Risk Management for Non-trading
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 non-trading 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 order 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 58 presents the spot and 12-month forward rates used
in our baseline forecasts at December 31, 2015 and 2014.
Table 58 Forward Rates
December 31, 2015
Federal
Funds
Three-
month
LIBOR
10-Year
Swap
Spot rates 0.50% 0.61% 2.19%
12-month forward rates 1.00 1.22 2.39
December 31, 2014
Spot rates 0.25% 0.26% 2.28%
12-month forward rates 0.75 0.91 2.55
Table 59 shows the pretax dollar impact to forecasted net
interest income over the next 12 months from December 31, 2015
and 2014, 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 more information on
net interest income excluding the impact of trading-related
activities, see page 29.
During 2015, the asset sensitivity of our balance sheet
increased due to higher deposit balances and lower long-end
interest rates. We continue to be asset sensitive to a parallel move
in interest rates with the majority of that benefit coming from the
short end of the yield curve. Additionally, higher 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 under the Basel 3 capital rules. Under
instantaneous upward parallel shifts, the near-term adverse
impact to Basel 3 capital is reduced over time by offsetting positive
impacts to net interest income. For more information on the
transition provisions of Basel 3, see Capital Management –
Regulatory Capital on page 52.
Table 59 Estimated Net Interest Income Excluding
Trading-related Net Interest Income
(Dollars in millions) Short
Rate (bps)
Long
Rate (bps)
December 31
Curve Change 2015 2014
Parallel Shifts
+100 bps
instantaneous shift +100 +100 $ 4,306 $ 3,685
-50 bps
instantaneous shift -50 -50 (3,903) (3,043)
Flatteners
Short-end
instantaneous change +100 — 2,417 1,966
Long-end
instantaneous change — -50 (2,212) (1,772)
Steepeners
Short-end
instantaneous change -50 — (1,671) (1,261)
Long-end
instantaneous change — +100 1,919 1,782
The sensitivity analysis in Table 59 assumes that we take no
action in response to these rate shocks and does not assume any
change in other macroeconomic variables normally correlated with
changes in interest rates. As part of our ALM activities, we use
securities, certain residential mortgages, and interest rate and
foreign exchange derivatives in managing interest rate sensitivity.
The behavior of our deposit portfolio in the baseline forecast
and in alternate interest rate scenarios is a key assumption in our
projected estimates of net interest income. The sensitivity analysis
in Table 59 assumes no change in deposit portfolio size or mix
from the baseline forecast in alternate rate environments. In higher
rate scenarios, any customer activity resulting in the replacement
of low-cost or noninterest-bearing deposits with higher-yielding
deposits or market-based funding would reduce the Corporation’s
benefit in those scenarios.
Interest Rate and Foreign Exchange Derivative
Contracts
Interest rate and foreign exchange derivative contracts are utilized
in our ALM activities and serve as an efficient tool to manage our
interest rate and foreign exchange risk. We use derivatives to
hedge the variability in cash flows or changes in fair value on our
balance sheet due to interest rate and foreign exchange
components. For more information on our hedging activities, see
Note 2 – Derivatives to the Consolidated Financial Statements.
Our interest rate contracts are generally non-leveraged generic
interest rate and foreign exchange basis swaps, options, futures
and forwards. In addition, we use foreign exchange contracts,
including cross-currency interest rate swaps, foreign currency
futures contracts, foreign currency forward contracts and options
to mitigate the foreign exchange risk associated with foreign
currency-denominated assets and liabilities.
Changes to the composition of our derivatives portfolio during
2015 reflect actions taken for interest rate and foreign exchange
rate risk management. The decisions to reposition our derivatives
portfolio are based on the current assessment of economic and
financial conditions including the interest rate and foreign currency