GE 2015 Annual Report Download - page 109

MD&A FINANCIAL RESOURCES AND LIQUIDITY
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We have eight deposit-taking banks outside of the U.S., which are classified as discontinued operations, and one deposit-taking bank in
the U.S., GE Capital Bank, an industrial bank (IB), which is also classified as discontinued operations. The IB currently issues
certificates of deposit (CDs) in maturity terms up to 10 years.
EXCHANGE RATE AND INTEREST RATE RISKS
Exchange rate and interest rate risks are managed with a variety of techniques, including match funding and selective use of
derivatives. We use derivatives to mitigate or eliminate certain financial and market risks because we conduct business in diverse
markets around the world and local funding is not always efficient. In addition, we use derivatives to adjust the debt we are issuing to
match the fixed or floating nature of the assets we are originating. We apply strict policies to manage each of these risks, including
prohibitions on speculative activities. Following is an analysis of the potential effects of changes in interest rates and currency exchange
rates using so-FDOOHG³VKRFN´WHVWVWKDWVHHNWRPRGHOWKHHIIHFWVRIVKLIWVLQUDWHV6XFKWHVWVDUHLQKHUHQWO\OLPLWHGEDVHGRQWKH
assumptions used (described further below) and should not be viewed as a forecast; actual effects would depend on many variables,
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x It is our policy to minimize exposure to interest rate changes. We fund our financial investments using debt or a combination of
debt and hedging instruments so that the interest rates of our borrowings match the expected interest rate profile on our assets. To
test the effectiveness of our hedging actions, we assumed that, on January 1, 2016, interest rates decreased by 100 basis points
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months. Based on the year-end 2015 portfolio and holding all other assumptions constant, we estimated that our consolidated net
earnings for the next 12 months, starting in January 2016, would decline by less than $0.3 billion as a result of this parallel shift in
the yield curve.
x It is our policy to minimize currency exposures and to conduct operations either within functional currencies or using the protection
of hedge strategies. We analyzed year-end 2015 consolidated currency exposures, including derivatives designated and effective
as hedges, to identify assets and liabilities denominated in other than their relevant functional currencies. For such assets and
liabilities, we then evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar, holding all
other assumptions constant. This analysis indicated that our 2016 consolidated net earnings would decline by less than $0.2 billion
as a result of such a shift in exchange rates. This analysis excludes any translation impact from changes in exchange rates on our
financial results.
DEBT AND DERIVATIVE INSTRUMENTS, GUARANTEES AND COVENANTS
CREDIT RATINGS
As of December 31, 2015, *(¶V and GE Capital¶V long-term unsecured debt ratings from Standard and 3RRU¶V Ratings Service (S&P)
were AA+ and the short-term funding rating from S&P were A-1+. The rating outlook for GE was downgraded from stable to negative on
October 7, 2015, while the rating outlook for GE Capital remains stable. On April 10, 2015, 0RRG\¶V Investors Service 0RRG\¶V
downgraded the senior unsecured debt rating for GE to A1 from Aa3 following *(¶V April 10 announcement of the GE Capital Exit
Plan. *(¶V P-1 short-term rating was affirmed. 0RRG\¶V affirmed GE Capital¶V A1/P-1 ratings. The rating outlook for GE and GE Capital
were stable. We are disclosing these ratings to enhance understanding of our sources of liquidity and the effects of our ratings on our
costs of funds. Although we currently do not expect a downgrade in the credit ratings, our ratings may be subject to a revision or
withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.
PRINCIPAL DEBT AND DERIVATIVE CONDITIONS
Certain of our derivative instruments can be terminated if specified credit ratings are not maintained and certain debt and derivatives
agreements of other consolidated entities have provisions that are affected by these credit ratings.
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and
changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us
according to the terms of our standard master agreements) on an individual counterparty basis. Where we have agreed to netting of
derivative exposures with a counterparty, we offset our exposures with that counterparty and apply the value of collateral posted to us
to determine the net exposure. We actively monitor these net exposures against defined limits and take appropriate actions in
response, including requiring additional collateral.
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