FirstCaribbean International Bank (Bahamas) Limited

Notes to Consolidated Financial StatementsFor the year ended October 31, 2009(Expressed in thousands of Bahamian dollars)26. Financial Risk ManagementA. Strategy in using financial instrumentsBy its nature the Bank’s activities are principally related to the use of financial instruments. The Bank accepts depositsfrom customers at both fixed and floating rates and for various periods and seeks to earn above average interestmargins by investing these funds in high quality assets. The Bank seeks to increase these margins by consolidatingshort-term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet all claimsthat might fall due.The Bank also seeks to raise its interest margins by obtaining above average margins, net of provisions, through lendingto commercial and retail borrowers with a range of credit standing. Such exposures involve not just on-balance sheetloans and advances but the Bank also enters into guarantees and other commitments such as letters of credit andperformance and other bonds.B. Credit riskCredit risk primarily arises from direct lending activities, as well as from trading, investment and hedging activities.Credit risk is defined as the risk of financial loss due to a borrower or counter party failing to meet its obligations inaccordance with agreed terms.Process and controlThe Credit Risk Management Department (“CRMD”) is responsible for the provision of the Bank’s adjudication, oversightand management of credit risk within its portfolios, including the measurement, monitoring and control of credit risk.The CRMD’s credit risk approval authority flows from the Board and is further delegated to the Chairman and theChief Risk Officer (“CRO”). The Credit Executive Committee is responsible for informing the CRO and Chairman ofcredit risk decisions. The Department is guided by the Bank’s Delegation of Authority Policy. Delegation is based onexposure and risk level; where the credit decision relates to larger and or higher risk transactions the Credit Committeeis responsible for the final decision.The Risk and Conduct Review Committee is responsible for approving policy requirements and key risk limits.Credit Risk LimitsCredit Limits are established for all loans (mortgages, personal and business & government) for the purposes ofdiversification and managing concentration. These include limits for individual borrowers, groups of related borrowers,industry sectors, country and geographic regions and products or portfolios. The Bank does not have excessiveconcentration in any single borrower, or related group of borrowers, industry sector or country.CollateralThe Bank’s employs a range of policies and practices to mitigate credit risk. The most traditional of these is the takingof security for funds advanced, which is common practice. The Bank implements guidelines on the acceptability ofspecific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances to customersare:• Mortgages over residential properties;• Charges over business assets such as premises, inventory and accounts receivable;• Charges over financial instruments such as debt securities and equities.The Bank’s credit risk management policies include requirements relating to collateral valuation and management,including verification requirements and legal certainty. Valuations are updated periodically depending upon the natureof the collateral. Management monitors the market value of collateral, requests additional collateral in accordance withthe underlying agreement during its periodic review of loan accounts in arrears. Policies are in place to monitor theexistence of undesirable concentration in the collateral supporting the Bank’s credit exposure.Geographic distributionThe following table provides a distribution of gross loans and advances to customers. Amounts are before allowance forcredit losses, and after credit risk mitigation, valuation adjustments related to the financial guarantors, and collateral onagreements.54