Bahamas - FirstCaribbean International Bank

FIRSTCARIBBEAN INTERNATIONAL BANK (BAHAMAS) LIMITEDNotes to Consolidated Financial StatementsOctober 31, 2002(expressed in thousands of Bahamian dollars)25 Use of financial instrumentsA Strategy in using financial instrumentsBy its nature the Bank’s activities are principally related to the use of financial instruments. The Bankaccepts deposits from customers at both fixed and floating rates and for various periods and seeks toearn above average interest margins by investing these funds in high quality assets. The Bank seeks toincrease these margins by consolidating short-term funds and lending for longer periods at higher rateswhilst maintaining sufficient liquidity to meet all claims that might fall due.The Bank also seeks to raise its interest margins by obtaining above average margins, net of provisions,through lending to commercial and retail borrowers with a range of credit standing. Such exposuresinvolve not just on-balance sheet loans and advances but the Bank also enters into guarantees andother commitments such as letter of credit and performance, and other bonds.B Credit riskThe Bank takes on exposure to credit risk which is the risk that a counterparty will be unable to payamounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limitson the amount of risk accepted in relation to one borrower, or groups of borrowers, and togeographical and industry segments. Such risks are monitored on a revolving basis and subject to anannual or more frequent review.The exposure to any one borrower including banks and brokers is further restricted by sub-limitscovering on and off-balance sheet exposures and daily delivery risk limits in relation to trading itemssuch as forward foreign exchange contracts. Actual exposures against limits are monitored daily.Exposure to credit risk is managed through regular analysis of the ability of borrowers and potentialborrowers to meet interest and capital repayment obligations and by changing these lending limitswhere appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporateand personal guarantees, but a significant portion is personal lending where no such facilities can beobtained.DerivativesThe Bank maintains strict control limits on net open derivative positions, i.e. the difference betweenpurchase and sale contracts, by both amount and term. At any one time the amount subject to creditrisk is limited to the current fair value of instruments that are favorable to the Bank (i.e. assets), whichin relation to derivatives is only a small fraction of the contractor or notional values used to expressthe volume of instruments outstanding. This credit risk exposure is managed as part of the overalllending limits with customers, together with potential exposures from market movements. Collateralor other security is not usually obtained for credit risk exposures on these instruments, except wherethe Bank requires margin deposits from counterparties.76