Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
65. Derivative instruments
The following table shows a breakdown of the Group´s derivative instruments classified by Moody´s rating:
2010 2009
Notional Fair value
Notional Fair value
amount Assets Liabilities amount Assets Liabilities
A1 42,371 19 768 68,874 962 -
Baa3 1,897 - 659 2,415 - 672
C - - - 90 - -
Unrated 3,706 4 18 3,381 9 3
Total 47,974 23 1,445 74,759 971 675
Liquidity risk
66. Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting its obligations associated with financial liabilities that are settled by
delivering cash or another financial asset, or of having to do so at excessive cost. This risk arises from possible mismatches in the timing of cash
flows.
67. Liquidity risk management
The Group has instituted a liquidity management policy for the Bank and its subsidiaries. The Risk and Finance Committee formulates this policy,
while the Treasury Department implements it in co-operation with the The Asset, Liability and Market Risk Unit, which is part of the Risk
Management Division. The objective of the liquidity management policy is to ensure, even in times of stress, that sufficient liquid assets and funding
capacity are available to meet financial obligations in a timely manner and at reasonable cost. Enforcing this policy has the further objective of
minimising fluctuations in liquidity.
The Group follows liquidity rules set by the Central Bank of Iceland to govern the ratio of weighted liquid assets and liabilities. These rules require the
ratio of weighted assets to weighted liabilities to stay above 1 for the next three months, and involve a stress test, weighting assets and liabilities
with specific coefficients and reflecting how accessible each asset would be in a liquidity crisis and how great the need would be to repay the
liability in question when due. The Group submits monthly reports on its liquidity position to the Central Bank of Iceland.
GGroup liquidity li idit risk ikiis managedd centrally t ll bby the th Treasury T Department D t t andd is i monitored it d by b the th Th The Asset, A t Liability Li bilit andd Market M ktRi Riskk Unit, U it both b th off which hi h
are located at the head office of the Bank. This allows management to monitor and manage liquidity risk throughout the Group. The Risk and
Finance Committee monitors the Group's liquidity risk, while the Group's internal audit assesses whether the liquidity management process is
designed properly and operating effectively.
The Group monitors intraday liquidity risk, short-term liquidity risk, and risk arising from mismatches of longer term assets and liabilities. Short-term
liquidity risk is defined as under 12 months. The Group has neither defaulted on any principal or interest nor breached any covenants in respect of
liabilities, that could lead such liabilities to be accelerated, up to the date of these consolidated financial statements being authorised for issue.
The Group’s liquidity management process includes projecting expected cash flows in a maturity profile rather than relying merely on contractual
maturities, monitoring balance sheet liquidity, monitoring and managing the maturity profile of liabilities and off-balance sheet commitments,
monitoring the concentration of liquidity risk in order to avoid undue reliance on large individual depositors, projecting cash flows arising from
future business, and maintaining liquidity and contingency plans which outline measures to take in the event of difficulties arising from liquidity
crisis.
The Asset, Liability and Market Risk Unit conducts stress tests by applying various hypothetical scenarios on the Group's liquidity position to ensure
that it has adequate liquidity to withstand stressed conditions. Different assumptions are drawn for each stress test to estimate the impact of a
variety of market conditions, in particular the lifting of capital controls in Iceland and how that would impact the Group’s deposit base.
The key measure used by the Group for monitoring liquidity risk is the ratio of core liquid assets to deposits, which shows the ratio of deposits that
the Group could deliver on demand without incurring any significant losses due to forced asset sales or other costly actions. Core liquid assets are
comprised of cash at hand, balances with Central Bank, loans to financial institutions (maturity within seven days) and assets eligible for repo
transactions with Central Bank (such as government bonds). The core liquidity ratio as at 31 December 2010 was 46% (2009: 36%).
NBI hf. Consolidated Financial Statements 2010 62
All amounts are in ISK million
162 Ársreikningur 2010 Allar upphæðir eru í milljónum króna