First Nations Bank of Canada (the “Bank”) is a federally regulated financial institution that is required to provide public disclosure pertaining to its capital and certain components of risk. These disclosures are consistent with the recommendations of the Basel Committee on Banking Supervision, the body that formulated the Basel framework to strengthen the soundness and stability of the international banking system.
First Nations Bank of Canada is a competitive, capable, service oriented provider of financial services. The Bank was founded with a focus on the Aboriginal market in Canada. The Bank is a leader in the provision of financial services to Aboriginal People and an advocate for the growth of the Aboriginal economy and the economic well-being of Aboriginal People. Shareholder value is increased through the Bank’s participation in and promotion for the development of the Aboriginal Economy.
The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Bank’s risk management policies are established to identify and analyze the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products, and services offered. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Key risks are regularly measured against policies and practices approved by the Bank’s Board of Directors (“Board”). These risks include credit risk, market risk (which includes interest rate risk and foreign exchange risk), operational risk, systems and technology risk and reliance on third parties, concentration risk, liquidity risk, business/strategy risk, and reputational risk.
Market Risk Expand/Collapse
Interest Rate Risk Expand/Collapse
Interest rate risk is defined as the potential impact of changes in market interest rates on the Bank’s earnings and present value of equity. The objective of interest rate risk management is to ensure that earnings are stable and predictable over time.
The Bank’s exposure to the risk of changes in market interest rates relates primarily to mismatches in the Bank’s assets and liabilities; when asset and liability and interest cash flows have different payment or maturity dates. These are called “mismatched positions”. The Bank’s exposure to interest rate risk depends on the size and direction of interest rate changes, and on the size and maturity of the mismatched positions.
The Bank’s policy is to measure and manage interest rate risk exposure in earnings and economic value perspectives. The Bank analyzes interest rate shock scenarios to estimate the impact of changes in interest rates on both the annual earnings at risk and the economic value of the Bank’s equity at risk. The Bank’s policy is to limit the variation in annual net interest income caused by a 1% increase (decrease) in market interest to 5% of annual net interest income. In addition, the Bank’s policy limits the change in the Bank’s economic value caused by a 1% increase (decrease) in market interest rates to 5% of shareholders’ equity.
Foreign Exchange Risk Expand/Collapse
Foreign exchange risk is defined as the risk that an adverse fluctuation in exchange rates may result in a loss in Canadian dollar terms to the Bank. The Bank’s Policy Statement on Foreign Exchange Risk Management outlines standards for the prudent management of the foreign exchange risk. The Bank manages its foreign exchange risk by the following:
- The Bank does not undertake any U.S. dollar lending activities, unless they are fully hedged;
- The Bank only participates in U.S. dollar denominated foreign currency assets and liabilities; and
- The Bank maintains an interest bearing U.S. dollar deposit account with the TD Bank, to hold balances such that the net notional U.S. dollar foreign exchange exposure of the Bank on a daily basis does not exceed the amount of U.S. one million dollars (U.S. $1,000,000)
Operational Risk Expand/Collapse
Operational risk arises from problems in the performance of business functions or processes. Exposures to this risk can result from deficiencies or breakdowns in internal controls or processes, technology failures, human errors or dishonesty, or natural catastrophes.
Internal controls are designed to safeguard our employees, customers, assets, information and preventing and to prevent and detect errors and fraud. The first level of protection from operational risk occurs at the transaction stage, through transaction review. In most cases, errors are detected at this stage. Business units and branches are responsible to ensure appropriate internal controls are in place at this level. The various self-assessment reviews assist the Bank in identifying key operational risks that the Bank might be exposed to. Internal audit performs risk-based audits to assess the adequacy of the internal controls in place for the size and complexity of the company’s operations. Should an operational risk event requiring escalation come to their attention, internal audit has direct access to the Audit and Risk Committee of the Board.
Senior management of the Bank has primary accountability for the ongoing management of operational risk in accordance with the Bank’s operational risk management policies. Through the enterprise risk management process, the executive assess enterprise level operational risks. In mid-2013, management and the Board refreshed the top risks facing the Bank and management will continue to provide quarterly updates on these risks and the mitigation strategies around them.
Systems and Technology Risk and Reliance on Third Parties Expand/Collapse
The Bank is highly dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems. The Bank deals with third parties to secure certain components essential to its business infrastructure, such as internet connections and various communication and database services. Disruption of such services, or the termination of a third-party software license or service agreement related thereto, could adversely affect the Bank's capacity to provide its products and services to its various clients, and ensure the continuity of its ongoing operations.
The Bank maintains close relationships with key vendors and relies on the annual system audits provided by external auditors to ensure their environments are securely managed. The Bank has a close working relationship with its vendors and vendor management plays a critical role in managements’ daily activities.
Concentration Risk Expand/Collapse
Liquidity Risk Expand/Collapse
Liquidity risk is the risk of loss resulting from failure to meet obligations because of the inability to liquidate assets. Lack of funding may be caused by the lack of access to capital markets, unexpected withdrawal of deposits or a reduced rate of deposit renewal by customers at the time of maturity. The Bank’s overall liquidity requirement is defined as the amount of liquidity needed to fund expected cash flows.
The Bank maintains a very liquid position given the inherent structure of the Bank’s lending assets and deposits. Assets must be currently marketable, of sufficient credit quality and available-for-sale to be considered readily convertible to cash. The Asset and Liability Committee (ALCO) oversees our liquidity risk management.