Anglo Pillar 3 Disclosures 2010

7/27/2019 Anglo Pillar 3 Disclosures 2010

1/52

Pillar3Disclosures

31December

2010


2/52

AngloIrishBank

Pillar3Disclosures

2

TableofContents

1. Background................................................................................................................................4 1.1 Regulatorycontext............................................................................................................ 41.2

Scope

of

application .......................................................................................................... 51.3 Supervision .................................................................................................................... ... 5

1.4 Transferabilityofcapital .................................................................................................... 51.5 DateofPillar3disclosures .................................................................................................. 51.6 Medium/LocationofPillar3................................................................................................ 51.7 Basisofpreparationandconsolidation ................................................................................ 5

2. PrincipalRisksandUncertainties...72.1 Introduction................................................................................................................... ... 72.2 Generaleconomicconditions.............................................................................................. 72.3 Governmentandrestructuringrisk...................................................................................... 72.4 Ratingsdowngrades .......................................................................................................... 82.5

Liquidity

and

funding

risk...................................................................................................8

2.6 NAMA ..............................................................................................................................92.7 Creditrisk .........................................................................................................................92.8 Operationalrisk............................................................................................................... 102.9 Eventsofdefaultrisk ....................................................................................................... 102.10 Regulatorycompliancerisk .............................................................................................. 102.11 Marketrisk...................................................................................................................... 112.12 Valuationrisk.................................................................................................................. 112.13 Litigationandlegalcompliancerisk .................................................................................. 11

3. RiskManagement..................................................................................................................... 133.1 Introduction.................................................................................................................... 133.2 Riskoversightandcorporategovernance .......................................................................... 133.3 Riskappetiteandstrategy................................................................................................ 15

4. MaterialBusinessRisks ............................................................................................................. 164.1 Individualrisktypes ......................................................................................................... 164.2 Creditrisk ....................................................................................................................... 164.3 Liquidityandfundingrisk................................................................................................. 194.4 Marketrisk...................................................................................................................... 214.5 Operationalrisk............................................................................................................... 244.6 Complianceandregulatoryrisk......................................................................................... 26

5. Capital..................................................................................................................................... 275.1 Capitalresources ............................................................................................................. 275.2

Derogations

from

regulatory

capital

requirements ............................................................. 29

5.3 PillarIcapitalapproaches................................................................................................. 295.4 ApproachtothecalculationoftheBanksinternalcapital ................................................... 295.5 Minimumcapitalrequirements ......................................................................................... 30

6. CreditRisk ............................................................................................................................... 316.1 Creditriskquantitativedisclosures.................................................................................... 316.2 Derivativecounterpartycreditrisk.................................................................................... 366.3 Exposuretocreditrisk ..................................................................................................... 376.4 Impairmentoffinancialassets .......................................................................................... 376.5 Creditriskmitigation ....................................................................................................... 44

7. ExternalCreditAssessmentInstitutions(ECAIs) ........................................................................ 46


3/52

AngloIrishBank

Pillar3Disclosures

3

8. EquityHoldings ....................................................................................................................... . 499. Securitisations ......................................................................................................................... 50

9.1 Grouproleandinvolvementinrelationtosecuritisations.................................................... 509.2 Accountingpoliciesforsecuritisations............................................................................... 509.3

Use

of

External

Credit

Assessment

Institutions .................................................................. 51

9.4 Securitisationpositionsheldandbrokendownbyexposuretype ........................................ 51


4/52

AngloIrishBank

Pillar3Disclosures

4

1. BackgroundAnglo Irish Bank CorporationLimited (Anglo,the Group orthe Bank) wasnationalisedbythe IrishGovernmenton21January2009

followingthesigningintolawoftheAngloIrishBankCorporationAct,2009.

ThespeedofdeteriorationintheIrisheconomyandbankingsectorinthesecondhalfof2010hasculminatedwiththeGovernment,the

InternationalMonetaryFund(IMF)andtheEuropeanCommission(EC)agreeingasubstantialassistancepackageforthecountrywhich

includedagreementstoreorganiseandrestructuretheIrishbankingsector.

The Credit Institutions (Stabilisation) Act 2010, which was enacted on 21 December 2010, gives broad powers to the Government, in

particular,inrelationto:(i)transferringrelevantinstitutionsassetsandliabilitiestofacilitatetherestructuringofthebankingsector;and

(ii)achievingappropriateburdensharingbysubordinatedcreditorsinrelevantinstitutionsthathavereceivedStatesupport,onacaseby

casebasisandunderparticularconditions.The legislationprovidesthe legislativebasis forthereorganisationandrestructuringofthe

bankingsystemagreedinthejointEU/IMFProgrammeandisthefirstimportantstepinputtinginplaceanextensiveSpecialResolution

Regime(SRR)thatwillprovideforacomprehensiveframeworktofacilitatetheorderlymanagementandresolutionofdistressedcredit

institutions.(Source:DepartmentofFinance).

Followinga

Direction

Order

made

by

the

Irish

High

Court

on

8

February

2011,

the

Bank

has

transferred

the

vast

majority

of

the

remaining

IrishandUKcustomerdepositstoAllied IrishBanks,p.l.c.(AIB)underaTransferOrderissuedbytheHighCourton24February2011.

AlsotransferredtoAIBunderthisorderweretheBanksholdingofseniorNationalAssetManagementAgency (NAMA)bondsand its

deposittakingsubsidiary inthe IsleofMan.AnotherkeyaspectoftheDirectionOrder involvestheproposaltocombinetheBankwith

Irish Nationwide Building Society (INBS), following the transfer of deposits from both institutions, into one entity regulated by the

CentralBankofIrelandandtocommenceanorderlyworkoutofthecombinedBankoveraperiodofyears.

1.1 RegulatorycontextThe Revised Basel Accord (Basel II) framework was implemented in the European Union (EU) through the Capital Requirements

Directive(CRD).

BaselII

consists

of

three

mutually

reinforcing

Pillars,

described

as

follows:

Minimum Capital Requirements (Pillar 1) involves the calculation of minimum capital requirements for credit, market and

operationalriskasprescribedbytheCRD;

SupervisoryReview(Pillar2)focusesonabanksInternalCapitalAdequacyAssessmentProcess(ICAAP)andtheSupervisory

ReviewandEvaluationProcess(SREP)byregulatorsofbanksinternalcapitaladequacy;and

Market Discipline (Pillar 3) requires banks to publicly disclose detailed quantitative and qualitative information on their risk

managementpolicies,practicesandexposurestoallowinvestorsandothermarketparticipantstounderstandtheriskprofile

oftheinstitution.

TheECamendedcertainaspectsoftheCRDwhenDirective2009/111/ECwasissuedinDecember2009.ThisCRD2Directive,whichwas

transposed into Irish law and came into effect on 31 December 2010, primarily amended aspects of the CRD in relation to new

requirementsfor

hybrid

tier

1

capital;

the

large

exposures

regulations;

risk

management

requirements

for

securitisations;

and

trading

bookcapitalrequirements.TheseamendmentshavenothadamaterialimpactonthecapitalpositionoftheGroup.

UnderBasel II/theCRD,theGroup isrequiredtopublishPillar3disclosuresandthisdocument istheGroupssecondPillar3disclosure

document.QuantitativedisclosuresasrequiredunderAnnexXIIoftheCRDareprovidedthroughoutthedocumentwhichshouldberead

inconjunctionwiththeGroupsAnnualReport&Accounts2010.1

Pillar3disclosuresarenotrequiredtobeauditedbytheBanksexternalauditors. Thedisclosuresinthisdocumenthavebeensubjecttoa

thoroughinternalreviewbuthavenotbeenaudited. ThisdocumenthasbeenpreparedinaccordancewiththeBanksPillar3Policy.

1http://www.angloirishbank.com/AboutUs/Reports


5/52

AngloIrishBank

Pillar3Disclosures

5

1.2 ScopeofapplicationTheBanksPillar3disclosuresaddresstheoperationsofAngloIrishBankCorporationLimitedanditssubsidiariesonaconsolidatedbasis.

TheprincipleactivityofthegroupistheprovisionofbankingservicesinaccordancewiththeRelationshipFrameworkbetweenthebank

andtheMinisterforFinance.

1.3 SupervisionThe Group is regulated by the Central Bankof Ireland (Central Bank) in Ireland. At 31 December 2010, the Grouphad three banking

licenses held by; Anglo Irish Bank Corporation Limited, Anglo Irish Mortgage Bank (AIMB) and Anglo Irish Bank Corporation

(International)PLC(AIBIOM),whichislocatedintheIsleofManand isregulatedbythe IsleofManFinancialSupervisionCommission.

AIBIOMwassoldtoAlliedIrishBanksp.l.con24February2011followingaTransferOrderissuedbytheIrishHighCourt.

1.4 TransferabilityofcapitalAngloIrishBankCorporationLimited,acreditinstitutionlicensedbytheCentralBank,istheGroupsparentcompany. At31December

2010AIMBandAIBIOMweretwowhollyowned licensedbankingsubsidiaries,bothofwhicharesubjectto individualcapitaladequacy

requirements. SubjecttomeetingtheminimumregulatoryrequirementsprescribedtotheBankbytheregulatoryauthoritiesregarding

themaintenanceofcapital,andcompliancewiththeAssetCoveredSecuritiesAct,2001,asamended,andtheconstitutionaldocumentsofthe relevant company, there were no impediments at 31 December 2010 to the prompt transfer of own funds or the repayment of

liabilitiesbetweenthesesubsidiariesandtheBank.

1.5 DateofPillar3disclosuresTheBanksdisclosuresarebasedonitsfinancialpositionasat31December2010.

1.6 Medium/LocationofPillar3ThemediumfortheBanksPillar3disclosuresisitsinternetsite(www.angloirishbank.com)wherethesedisclosuresarepubliclyavailable.

1.7 BasisofpreparationandconsolidationThis section sets out the differences between the basis of consolidation for statutory reporting purposes and prudential reporting

purposes.

Statutoryreporting

TheBankpreparesitsfinancialstatements,onaconsolidatedbasis,tocomplywithInternationalFinancialReportingStandards(IFRS),

asadoptedbytheEuropeanUnion(EU),andrelevantIrishlegislation.

Theconsolidated financialstatements includethe financialstatementsofAngloandallof itssubsidiaryundertakings(includingspecial

purposeentities)thatarerequiredtobeconsolidatedunderIFRS,asat31December2010. AnentityisasubsidiarywheretheGrouphas

thepower,directlyorindirectly,tocontrolthefinancialandoperatingpoliciesoftheentitysoastoobtainbenefitsfromitsactivities. The

existenceandeffectofpotentialvotingrightsthatarecurrentlyexercisableorconvertibleareconsideredinassessingwhethertheGroup

controlstheentity.

The activities of the Banks principal subsidiaries include banking, life assurance and pension activities, property investment, acting as

investmentholdingfirmsfortheGroupandotherfinanceactivities.

SubsidiariesareconsolidatedfromthedateonwhichcontrolistransferredtotheGroupuntilthedatethatcontrolceases. Thepurchase

method of accounting is used bythe Group to account for the acquisitionofsubsidiary undertakings. Intercompany balances andany

unrealisedgainsandlosses,orincomeandexpenses,arisingontransactionsbetweenGroupentitiesareeliminatedonconsolidation.


6/52

AngloIrishBank

Pillar3Disclosures

6

TheGroupsinterestsinjointventuresandassociatesarerecognisedusingtheequitymethodofaccountingandareinitiallyrecognisedat

cost, with the exception of interests injoint venturesor associates held under investmentcontracts which aredesignated at fair value

throughprofitorloss. Undertheequitymethod,theGroupsshareofthepostacquisitionprofitsorlossesaftertaxationofjointventures

and associates is recognised in profit or loss and its share of postacquisition movement in reserves is recognised in reserves. The

cumulativepostacquisitionmovementsareadjustedagainstthecarryingamountoftheinvestment.

Prudentialreporting

TheGroupsubmitsCommonReporting(COREP)templatestotheCentralBankofIrelandfortheassessmentofitscapitaladequacyona

monthlybasis. TheGroupconsolidatesallsubsidiariesthatarerequiredtobeconsolidatedunderIFRS. However,forregulatorycapital

adequacy purposes, the Groups life assurance subsidiary company is not fully consolidated and the investment in the undertaking is

deductedfromtotalcapitalunderthenationaldiscretionavailableuntil2012. Insubsequentyears,thisinvestmentwillberequiredtobe

deducted50%fromTier1capitaland50%fromTier2capital.


7/52

AngloIrishBank

Pillar3Disclosures

7

2. PrincipalRisksandUncertainties2.1 IntroductionTheGroupissubjecttoavarietyofrisksanduncertaintiesinthenormalcourseofitsbusinessactivities.

The Board of Directors and senior management have ultimate responsibility for the governance of all risk taking activity and have

establishedaframeworktomanageriskthroughouttheGroup.

TheprincipalbusinessrisksanduncertaintiesbelowarethoseriskswhichtheDirectorscurrentlybelievetobematerialtotheGroup.The

precise nature of all the risks and uncertainties that the Group faces cannot be predicted and many of these risks are outside of the

Groupscontrol.

2.2 GeneraleconomicconditionsTheGroupsresultsareinfluencedbygeneraleconomicandotherbusinessconditionsintheGroupsthreekeymarkets:Ireland,theUK

andtheUS.

Economicconditions in Irelandremain extremely challenging andconsequently theresultsof theGrouphavebeenadverselyaffected.

Irelandcontinuestoexperiencehighunemployment,reducedconsumerconfidence,acontractioninthehousingmarket,andacontinued

decline incommercialactivity,allofwhichhavecontributedtoadecline ineconomicgrowth.TheprospectsfortheIrisheconomyhave

deterioratedinrecentmonths.TheapplicationforEU/IMFfinancialsupportwasapprovedon21November2010.Marketsentimenthas

continuedtobenegativelyaffectedbyuncertaintyaboutthepoliticalsituation,continuinguncertaintyregardingthebankingsectorand

abouttheeconomicimpactoftheausteritymeasuresintroducedintheDecember2010budget.However,exportledgrowthmayprovide

theimpetusforagradualrecovery.

AnycontinueddeteriorationinpropertypricescouldfurtheradverselyaffecttheGroupsfinancialconditionandresultsofoperations.The

Groups financial performance mayalsobeaffectedby futurerecovery ratesonassetsand thehistorical assumptionsunderlyingasset

recoverymaynolongerbeaccurategivengeneraleconomicinstability.WhileconditionsintheUKandUShaveimproved,thereremains

uncertaintysurroundingthesustainabilityoftheglobaleconomicrecovery,particularlyiffiscalandmonetarysupportsarewithdrawn.In

theUK,there istheriskthataslowdown inthedemand forgoodsandservicesdue toUKGovernmentspendingcutbacksandhigher

taxescouldhaveanegativeeffectonthecountrysmodesteconomicrecovery.Asaresult,unemploymentwouldincrease,andresidential

andcommercialpropertywouldsufferasecondperiodoffallingprices.

2.3 GovernmentandrestructuringriskAstheonlyshareholder,theIrishGovernmentisinapositiontoexertsignificantinfluenceovertheGroupanditsbusinessandtheBankis

whollyreliantonitssupport.GovernmentpolicyinrespectofboththeBankandthewiderfinancialservicessectorhasamajorimpacton

the Group. Changes to government policies or the amendment of existing policies could adversely impact the financial condition and

prospectsof theGroup.For instance, ifnewgovernmentalpoliciesweretorequire the Bank toresolve itsposition overa shorterthan

expectedtimeframe,projectedassetrecoveryvaluescouldbenegativelyimpacted.

OverthecourseoftheyeartheBankhasbeenworkingwiththeDepartmentofFinance,theNationalTreasuryManagementAgencyand

the CentralBank of Irelandto decide upon the future of theBank. A plan for theBanks restructuring wassubmitted to theEuropean

Commission(EC) inMay2010.Giventhechangingcircumstances inthebroadereconomyandfinancialsector in Ireland,thisplanwas

revisedinOctober,withafurtherplansubmittedon31January2011.

The speed of deterioration in the economy and the banking sector in the second half of 2010 has culminated with the Government,

InternationalMonetaryFund(IMF)andtheECagreeingasubstantialassistancepackageforthecountrywhichincludedagreementsto

reorganiseandrestructuretheIrishbankingsector.Inthatrespect,theIMFandtheECalsohaveasignificantinfluenceonthefutureof

theBank.

TheCreditInstitutions(Stabilisation)Act2010,whichwasenactedon21December2010,givesbroadpowerstotheGovernment,in

particular,in

relation

to:

(i)

transferring

relevant

institutions

assets

and

liabilities

to

facilitate

the

restructuring

of

the

banking

sector;

and

(ii)achievingappropriateburdensharingbysubordinatedcreditorsinrelevantinstitutionsthathavereceivedStatesupport,onacaseby


8/52

AngloIrishBank

Pillar3Disclosures

8

case basis and under particular conditions. The legislation provides the legislative basisfor the reorganisation and restructuring of thebanking system agreed inthejoint EU/IMF Programme andis thefirst importantstep inputting inplace an extensive Special ResolutionRegime (SRR) that willprovidefor a comprehensiveframework tofacilitate the orderly management and resolution of distressed creditinstitutions.(Source:DepartmentofFinance)On

8

February

2011

the

Bank

received

a

Direction

Order

from

the

High

Court

to:

Begin a process, in accordance with EU State Aid rules, to transfer deposits and assets held by the Bank to a thirdparty

financialinstitutionorinstitutions;and

FormulatedetailedstepsplansfortheimplementationofcertainaspectsoftherestructuringplanassubmittedtotheECfor

approvalattheendofJanuary2011.

ThisorderfacilitatestheMinistersplantorestructuretheBank,whichisinaccordancewiththeprovisionsoftheEU/IMFProgrammeof

Financial Support for Ireland. Significant organisational restructuring will need to be undertaken by the Bank to implement the

restructuringplanandtherelatedoperationalriskassociatedwiththetransferofdepositscouldhaveanadverseimpactontheoperations

andfinancialconditionoftheGroup.

Thejointstepsplan,whichissubjecttoECapproval,providesfortheamalgamationoftheBankwithIrishNationwideBuildingSocietyin

thefirst

half

of

2011.

It

is

envisaged

that

once

the

restructuring

plan

is

approved

by

the

authorities,

the

restructured

group

will

work

out

its

assets inanorderlyprocessovertime,withtheobjectiveofsecuringthebestpossiblerealisation inthe interestoftheStateandofthe

taxpayer.

2.4 RatingsdowngradesInNovember2010,theBankslongtermStandard&Poors(S&P)counterpartycreditratingwasdowngradedbysixnotchestoB,below

investmentgrade.SimilaractionwastakenbyMoodys inDecember2010 (rating cut from Baa3to Ba3)andby Fitch inFebruary2011

(ratingcutfromBBB toBB).Intakingtheseratingactions,creditratingagenciescitedconcernsaboutsovereignsupportfortheBank.In

February2011therewerefurtherdowngradestocreditratingswithS&PcuttoB andMoodyscuttoCaa1.Creditratingdowngradeson

bonds issued by Group entities have negatively impacted on the eligibility of some of these bonds as collateral for Central Bank and

monetaryauthorityfunding.

2.5 LiquidityandfundingriskLiquidity and funding risk is the risk that the Group does not have sufficient financial resources available at all times to meet its

contractualandcontingentcashflowobligationsorcanonlysecuretheseresourcesatexcessivecost.Thisriskisinherentinallbanking

operationsandcanbeaffectedbyarangeofinstitutionspecificandmarketwideevents.TheGroupsliquiditymaybeadverselyaffected

byanumberoffactors,includingsignificantunforeseenchangesininterestrates,ratingsdowngrades,higherthananticipatedlosseson

loansanddisruptionsinthefinancialmarketsgenerally.

Inresponsetomajormarketinstabilityandilliquidity,governmentsandcentralbanksaroundtheworldhaveintervenedinordertoinject

liquidityandcapitalintofinancialmarkets,and,insomecases,topreventthefailureofsystemicallyimportantfinancialinstitutions.These

variousinitiativestostabilisefinancialmarketsaresubjecttorevocationorchange,whichcouldhaveanadverseeffectontheavailability

offunding

to

the

Group.

In common with many other banks, the Groups access to traditional sources of liquidity remains constrained. The Bank experienced

greater reliance on Government and monetary authority support mechanisms due to significant customer deposit outflows and the

maturityofdebtsecurities.TheBankscontinuedrelianceonsupportfromCentralBanksincludesaccesstospecialfundingfacilities.The

funding support from Central Banks and monetary authorities amounted to 45.0bn at 31 December 2010, representing 70% of total

funding, and included 28.1bn borrowed under special liquidity facilities. This support has increased following the transfer in February

2011ofdepositsandNAMAbondsundertheHighCourtTransferOrder.

ShouldmonetaryauthoritiesmateriallychangetheireligibilitycriteriaorlimittheBanksaccesstosuchspecialfundingfacilitieswithout

providing an alternative funding source, this would adversely affect the Groups financial condition and prospects. Additionally, credit

rating downgrades may impact on the eligibility of assets currently pledged as collateral for Central Bank open market sale and

repurchaseagreements.


9/52

AngloIrishBank

Pillar3Disclosures

9

2.6 NAMAOn 9 February 2010, the Bank applied to be designated as a participating institution in NAMA. This application was accepted by the

MinisterforFinanceon12February2010.

TheNAMA

Act

provides

for

the

acquisition

by

NAMA

from

participating

institutions

of

eligible

bank

assets,

which

may

include

performing

andnonperformingloansmadeforthepurpose,inwholeorinpart,ofpurchasing,exploitingordevelopingdevelopmentlandandloans

associatedwiththeseloans.

In the year ended 31 December 2010 the Bank transferred 33.9bn of assets (gross of impairment provisions of 11.9bn) to NAMA,

generating a loss on disposal of 11.5bn. The 17.5bn of loans acquired by NAMA in November and December 2010 were transferred

withoutNAMAhavingcompletedfullduediligence.NAMAreservetherighttoadjusttheconsiderationpaidfortheseassetswhenthe

duediligenceiscompleted.Thefinallossontransferwillthereforeonlybedeterminedwhenfullduediligenceinrespectoftheassetshas

beencompleted.

At 31 December 2010 the Bank has 1.1bn of loans remaining to transfer to NAMA. Not all of these assets may ultimately transfer to

NAMA.

TheGroupmayberequiredtoindemnifyNAMAinrespectofvariousmatters,includingNAMAspotentialliabilityarisingfromanyerror,

omission,ormisstatementonthepartoftheGroupininformationprovidedtoNAMA.Inaddition,theECmayassessthecompatibility

andpriceofthetransferredassetsandcouldinvokeaclawbackmechanisminthecaseofexcesspayments.

The NAMA Act provides that up to five per cent of the debt securities that will be issued to a participating institution may be

subordinated.IfNAMAultimatelymakesaloss,theGroupmaynotrecoverthefullvalueofthosesubordinatedbonds.Notwithstanding

these uncertainties, the transfer of assets to NAMA is a fundamental part of the Banks restructuring process and has served as the

primarymechanismfordeleveragingthebalancesheet,reducingcreditriskexposureandprovidingadditionalliquidity.

2.7 CreditriskCredit

risk

is

the

risk

that

the

Group

will

suffer

a

financial

loss

from

a

counterpartys

failure

to

pay

interest,

repay

capital

or

meet

a

commitment,andthecollateralpledgedassecurityisinsufficienttocoverthepaymentsdue.ItarisesprimarilyfromtheGroupslending

activities to customers, interbank lending and repurchase agreements, investment in availableforsale debt securities and derivative

transactions.

AdversechangesinthecreditqualityoftheGroupsborrowers,counterpartiesandtheirguarantors,andadversechangesarisingfromthe

general deterioration inglobal economic conditions, havereduced the recoverability of the Groups loan assets andhave continuedto

increasethequantumofimpairedloansandimpairmentchargesduringtheperiod.

The Group has exposures to a range of customers in different geographies, including exposures to investors in, and developers of,

commercialandresidentialproperty.Irishpropertypricescontinuedtoshowsignificantdeclinesthroughoutthelastyearanddevelopers

of commercial and residential property are facing particularly challenging market conditions, including substantially lower prices and

volumes.In

addition,

the

Groups

exposure

to

credit

risk

is

exacerbated

when

the

collateral

it

holds

cannot

be

realised

or

is

liquidated

at

pricesthatarenotsufficienttorecoverthefullamountoftheloan,whichismostlikelytooccurduringperiodsofilliquidityanddepressed

assetvaluations,suchasthosecurrentlybeingexperienced.

TheIrishpropertymarketsremainseverelyimpactedbyalackofconfidenceandliquiditywhichhasledtofurtherreductionsinproperty

collateralvalues.This,togetherwithanextremelydifficultoperatingenvironmentintheGroupskeymarkets,particularlyinIreland,and

therapiderosionofclientsnetworthhasresultedinasubstantialdeteriorationintheassetqualityoftheBanksloanbook.

TheGroupsfinancialperformancewillbeaffectedbyfuturerecoveryrateson loanassets.Anyfurtherdeterioration inpropertyprices,

any failure of prices to recoverto their long term averages or any delay inrealising collateral secured on these loan assets will further

adverselyaffecttheGroupsfinancialconditionandresultsofoperations.


10/52

AngloIrishBank

Pillar3Disclosures

10

Following the submission of the restructuring plan to the EC, the Group is also exposed to additional recovery risk given that

counterparties are aware that the plan provides for an orderly work out of its loan book over a period of years. As a result, amounts

recoverablemaybereduced.

2.8 OperationalriskOperational risk is the risk of loss arising from inadequate controls and procedures, unauthorised activities, outsourcing, human error,

systemsfailureandbusinesscontinuity.Operationalriskisinherentineverybusinessorganisationandcoversawidespectrumofissues.

TheGroupsmanagementofitsexposuretooperationalriskisgovernedbyapolicypreparedbyGroupRiskManagementandapproved

bytheRiskandComplianceCommittee.

The Groups exposure to operational risk is elevated following the issuance of the Transfer Order by the High Court in February 2011,

whichresultedintheimmediatetransferofthedepositbookandcertainGovernmentguaranteedassetstoAlliedIrishBanks,p.l.c.(AIB).

Duetothetighttimelines involvedandthemechanicsofthetransfer,whichalso involvedthe immediatetransferofa largenumberof

Bankstaff,theBankisnowexposedtoheightenedoperationalriskconcerningthetemporarytransitionalarrangements.

Furthermore,giventhesubmissionoftherestructuringplantotheECinJanuary2011,whichenvisagestherestructuringandorderlywork

outof

the

Banks

loan

book

over

a

period

of

years,

there

is

the

added

risk

of

a

weakened

control

environment.

The

lack

of

career

prospects

andincentivesinthemediumtermmayleadtodisillusionmentamongremainingstaff,withanincreasedassociatedriskofmaterialerror.

Separately,thecurrenteconomicclimateincreasestheriskoftheoccurrenceoffraud.

2.9 EventsofdefaultriskThe Group's debt securities programmes and subordinated capital instruments contain contractual covenants and terms for events of

defaultwhich, ifbreachedortriggered,couldresult inanactualorpotentialdefaultthatmightresult inthedebtconcernedbecoming

payableimmediately,orotheradverseconsequencesoccurring.Insomecases,acovenantbreachoreventofdefaultmayariseiftheBank

oranyofitsprincipalsubsidiariesceasesorthreatenstoceasetocarryonitsbusinessoranysubstantialpartofitsbusiness.

TheCreditInstitutions(Stabilisation)Act2010(theStabilisationAct)includesimportantprovisionsthataredesignedtopreventanevent

ofdefault

becoming

applicable

because

of

an

order

or

certain

requirements

made

under

the

Stabilisation

Act

or

anything

done

on

foot

of

suchanorderorrequirements.TheStabilisationActprovidesthatanorderorcertainrequirementsmadeundertheStabilisationActmay

take effect as a reorganisation measure under the Credit Institutions Reorganisation and Winding Up Directive (CIWUD) and any law

givingeffecttoit.TherelevantprotectiveprovisionsoftheStabilisationActapplyinrelationtotheDirectionOrdermadeon8February

2011 and the transfer of deposits and of assets to AIB contemplated by the Direction Order, and effected on 24 February 2011 by a

Transfer Order made under the Stabilisation Act. Each such order was declared to be a reorganisation measure for the purposes of

CIWUD. Accordingly, the Stabilisation Act and laws giving effect to CIWUD confer important protections from business cessation and

otherdefaultriskinrespectofthemattersandtimelinescontainedintherelevantorders.

Pursuant to the Banks 30bn Euro Medium Term Note Programme and the Groups 10bn Global Covered Bond Programme, from

September2010theBankhasreceivedseveralrequeststoprovidecertificatesthatnoeventofdefaultorpotentialeventofdefaultunder

therelevantprogrammehasoccurredduringtheperiodspecifiedtherein,andtherelatedcorrespondencehasinsomeinstancesincluded

referenceto

the

question

of

whether

an

event

of

default

of

the

kind

referred

to

above

has

occurred.

On

each

occasion,

the

Bank

has

providedtherequiredcertificatewithintherequiredtimeframeconfirmingthatnosuchdefaulthasoccurred.

2.10 RegulatorycomplianceriskRegulatory compliance risk primarily arises from a failure or inability to comply fully with the laws, regulations, standards or codes

applicablespecifically to regulated entities inthe financialservices industry. TheBank is not in full compliance with all Irishregulatory

requirements.WhiletheBankensuresthattherelevantauthoritiesarekeptfully informedinthisregard,noncompliancemayresult in

theGroupbeingsubjecttoregulatorysanctions,materialfinanciallossand/orlossofreputation.

Regulatoryriskalsoincludestaxcompliancerisk,whichistheriskassociatedwithchangesintaxlaworintheinterpretationoftaxlaw.It

also includes the risk of changes in tax rates and the risk of failure to comply with procedures required by tax authorities. Failure to

managetax

risk

effectively

could

lead

to

additional

tax

charges.

It

could

also

lead

to

financial

penalties

for

failure

to

comply

with

required

taxproceduresorotheraspectsoftaxlaw.TheGroupissubjecttotheapplicationandinterpretationoftaxlawsinallcountriesinwhichit


11/52

AngloIrishBank

Pillar3Disclosures

11

operates. In relation to any tax risk, if the costs associated with the resolution of the matter are greater than anticipated, it could

negativelyimpactthefinancialpositionoftheGroup.

Capital risk is the risk that the Group has insufficient capital resources to meet its minimum regulatory capital requirements. Losses

incurredbytheBankduringtheyearto31December2010placedsignificantstressontheBank'sregulatorycapitalresourcesandresulted

inthe

Minister

for

Finance,

as

the

sole

shareholder,

providing

17.0bn

of

additional

capital

contributions

during

the

year.

Further

losses,

includingthoseresultingfromfurtherNAMAtransfers,couldagainleadtoregulatorycapitalconstraintsinthefuture.

Changesingovernmentpolicy,legislationorregulatoryinterpretationapplyingtothefinancialservicesindustrymayadverselyaffectthe

Groups capital requirements and, consequently, reported results and financing requirements. These changes include possible

amendmentstogovernmentandregulatorypoliciesandsolvencyandcapitalrequirements.

2.11 MarketriskMarketriskistheriskofapotentialadversechangeintheGroupsincomeorfinancialpositionarisingfrommovementsininterestrates,

exchangeratesorothermarketprices.Changesininterestratesandspreadsmayaffecttheinterestratemarginrealisedbetweenincome

onlendingassetsandborrowingcosts.

WhiletheGrouphasimplementedriskmanagementmethodstomitigateandcontroltheseandothermarketriskstowhichitisexposed,

itisdifficulttoaccuratelypredictchangesineconomicormarketconditionsandtoanticipatetheeffectsthatsuchchangescouldhaveon

theGroup.

BorrowingsfromCentralBanksandalargeproportionoftheGroupsotherfundingbalancesaredenominatedineurowhilethemajority

oftheGroupslendingassetsaredenominatedineuro,sterlingandUSdollars.Asaconsequence,theGrouphasmadeextensiveuseof

foreigncurrencyderivativestomanagethecurrencyprofileofitsbalancesheetduringtheyear.Continuedaccesstomarketparticipants

isrequiredtoenabletheGrouptocontinuewiththisriskmanagementstrategy.

Thepromissory note,whichisafixedrateinstrument,hasresulted intheGrouphavingsignificantinterestrateriskexposure.TheBank

hashedgedatotalof4.6bnofthenominalamountusinginterestrateswaps.Afurther6.1bnofeconomichedgesexistintheformof

theGroups

capital

and

fixed

rate

debt

issuance.

However,

significant

fixed

rate

exposure

remains,

with

limited

capacity

to

hedge

further

amountswithmarketcounterparties.

IncurrentmarketcircumstancesitisenvisagedthattheBankwillhavetocontinuetorelyonsupportmechanismsprovidedbymonetary

andgovernmentalauthorities.

2.12 ValuationriskTo establish the fair value of financial instruments, the Group relies on quoted market prices or, where the market for a financial

instrument isnotsufficientlyactive, internalvaluationmodelsthatutiliseobservablemarketdata. Incertaincircumstances,observable

marketdataforindividualfinancialinstrumentsorclassesoffinancialinstrumentsmaynotbeavailable.Theabsenceofquotedpricesin

active markets increases reliance on valuation techniques and requires the Group to make assumptions,judgements and estimates to

establishfair

value.

In

common

with

other

financial

institutions,

these

internal

valuation

models

are

complex,

and

the

assumptions,

judgements andestimatestheGroup isrequiredtomakeoftenrelatetomattersthat are inherentlyuncertain.Thesejudgementsand

estimatesareupdatedtoreflectchangingfacts,trendsandmarketconditionsandanyresultingchangeinthefairvaluesofthefinancial

instrumentscouldhaveanadverseeffectontheGroupsearningsandfinancialposition.

2.13 LitigationandlegalcomplianceriskThe Groups business is subject to the risk of litigation by customers, employees, shareholders or other third parties through private

actions,classactions,administrativeproceedings,regulatoryactions,criminalproceedingsorother litigation.Theoutcomeofanysuch

litigation,proceedingsoractions is difficult to assess orquantify.The costto defend future proceedingsoractionsmaybesignificant.

Theremayalsobeadversepublicityassociatedwithanysuchlitigation,proceedingsoractionsthatcouldimpacttheGroupandresultina

decrease in customer acceptance of the Groups services, regardless of whether the allegations are valid or whether the Group is

ultimatelyfound

liable.

As

a

result,

such

litigation,

proceedings

or

actions

may

adversely

affect

the

Groups

business,

financial

condition,

results,operationsorreputation.


12/52

AngloIrishBank

Pillar3Disclosures

12

Inthe periodsinceDecember2008,variousregulatory bodies in Irelandhave initiated investigations (including insomecases,criminal

investigations) into certainaspects of theBanksbusiness, includingcertain loanandother transactions involving formerDirectorsand

certain third parties. These investigations are ongoing and it is not possible at this stage to give any indication as to whether these

investigations will result in civil, administrative or criminal proceedings against the Bank or any of its current or former Directors or

officers.

DuetothecomplexityoftheanticipatedrestructuringoftheBank,thereisapotentialforunforeseenlegalriskstoarise.


13/52

AngloIrishBank

Pillar3Disclosures

13

3. RiskManagement3.1 IntroductionGroupRiskManagementisanindependentfunctionthatreportsdirectlytotheGroupChiefExecutiveoftheBankwithresponsibilityfor

ensuringthatrisksareidentified,assessedandmanagedthroughouttheGroup.TheBankhasariskmanagementframeworkinplacefor

identifying,evaluatingandmanagingthesignificantrisksfacedbytheGroup.Thisframeworkisregularlyreviewedandupdated. Therisk

management framework is designed to manage rather than eliminate the risk associated with the Groups business objectives and

providesreasonablebutnotabsoluteassuranceagainstmaterialfinancialmisstatementorloss.Suchlossescouldariseduetothenature

oftheGroupsbusinessinundertakingawiderangeoffinancialservicesthatinherentlyinvolvevaryingdegreesofrisk.

SincetheBankwastakenintoStateownershipin2009,thenewmanagementteamhasfocussedonthestabilisationandderiskingofthe

Bank,whilemaximisingtherecoveryofoutstandingloans.Thebalancesheetcontinuestobereducedandmanagedinthepublicinterest

andinamannerthatultimatelyminimisesthetotalcosttothetaxpayer.Outstandingloanbalanceshavebeensignificantlyreducedinthe

periodwithtotalgrossloansof33.3bntransferringtoNAMA.Fromafundingandliquidityperspective,theBankisreliantontheongoing

supportofitsShareholderandtherelevantauthorities.

On24February2011depositsandNAMAbondstransferredtoAllied IrishBanks,p.l.c.,effectedbyaTransferOrder,whilea longterm

foreignexchangeswapagreementwasexecutedwiththeNationalTreasuryManagementAgency('NTMA')inMarch2011.Bothofthese

transactionsoccurredafterthereportingperiod,howevertheyimpactfundingandliquidityriskandarerelevanttoanunderstandingof

theBanksexposuretotheserisks.

ThissectiondescribestheriskmanagementandcontrolframeworkinplaceintheBankandsetsoutthekeyriskswhichcouldimpactthe

Banks future results and financial position. The risks discussed below should not be regarded as a complete and comprehensive

statementofallpotentialrisksanduncertaintiesastheremayberisksanduncertaintiesofwhichtheBankisnotawareorwhichtheBank

doesnotcurrentlyconsidersignificantbutwhichmaybecomesignificantinthefuture.

3.2 RiskoversightandcorporategovernanceCurrentbestpracticecorporategovernancestandardsforbanksweresetoutinthe2006recommendationsoftheBaselCommitteeon

BankingSupervision.TheCommitteehasexpandedonthesebestpracticestandardsbyissuingfurther'Principlesforenhancingcorporate

governance' inOctober2010.Theseprinciplesreaffirmed theprimarypoints ofthe 2006guidance. Inrespect ofriskmanagementand

internalcontrols,theCommitteesetoutthefollowingprinciples:

Banks should have an effective internal controls system and a risk management function (including a Chief Risk Officer or

equivalent)withsufficientauthority,stature,independence,resourcesandaccesstotheBoard;

Risksshouldbeidentifiedandmonitoredonanongoingfirmwideand individualentitybasis,andthesophisticationoftheBank's

risk management and internal control infrastructures should keep pace with any changes to the Bank's risk profile (including its

growth)andtotheexternalrisklandscape;

Effective risk management requires robust internal communication within the Bank about risk, both across the organisation and

throughreportingtotheBoardandseniormanagement;and

TheBoardandseniormanagementshouldeffectivelyutilisetheworkconductedbythe internalaudit function,externalauditors,

andinternalcontrolfunctions.

TheBanksapproachisfurtherinfluencedbytheprinciplesoftheFinancialReportingCouncil(FRC),includingtheirguidelinesforgood

corporategovernance,andrecentpublicationswhichfocusonriskidentificationandreporting,andalsobythestandardsandguidelines

setoutbytheCommitteeofEuropeanBankingSupervisors('CEBS').

TheCentralBankofIrelandhasintroducedaCorporateGovernanceCodeforCreditInstitutionsandInsuranceUndertakingswhichapplies

from 1 January 2011. This governance code, amongst other matters, sets out the requirements for Irish credit institutions to prepare

documentedriskappetitestatementsandestablishriskcommitteeswithresponsibilityforoversightandadvicetotheBoardoncurrent

riskexposuresoftheentityandfutureriskstrategy.

TheBanksapproachtocorporategovernanceandriskmanagementistoensurethatthereisindependentcheckingofkeydecisionsby

management.TheBankhasanestablishedriskoversightframeworktodeliveronthisapproach.


14/52

AngloIrishBank

Pillar3Disclosures

14

RiskandComplianceCommittee

TheRiskandComplianceCommittee'sroleistooverseeriskmanagementandcompliancewithintheGroup.Itreviews,onbehalfofthe

Board, the keyrisksand compliance issues inherent inthebusinessandthesystemof internalcontrolnecessarytomanagethem and

presents itsfindingstotheBoard.This involvesoversightofmanagement'sresponsibilitytoassessandmanagetheGroup'sriskprofile

andkey

risk

exposures

covering

credit,

liquidity

and

funding,

market,

operational,

and

compliance

and

regulatory

risks.

ThekeyresponsibilitiesoftheCommitteeinclude:

ReviewandoversightoftheriskandcomplianceprofileoftheGroupwithinthecontextoftheBoardapprovedriskappetite;

MakingrecommendationstotheBoardconcerningtheGroupsriskappetiteandmaterialriskmanagementpolicies;

Review and oversight of managements plans for mitigation of the material risks faced by the various business units of the

Group;and

OversightoftheimplementationandreviewofriskmanagementandinternalcompliancesystemsthroughouttheGroup.

TheBank'sriskappetitestatementwasapprovedbytheBoardon26November2009.FurtherconsiderationoftheBank'sriskappetite

hasbeendeferredforconsiderationuntil2011,pendingapprovaloftherestructuringplanbytheEuropeanCommission.TheCommittee

alsomonitorsprogressoftheBank's internalNAMAunitwhichhasmanagementresponsibility inrespectofNAMAassettransfersand

loanmanagement

for

such

assets,

subject

to

the

over

riding

authority

of

NAMA

itself.

The Board delegates its monitoring and control responsibilities to the Credit Committees for credit risk (including banking and

counterpartycreditrisk)andtotheGroupAssetandLiabilityCommittee ('ALCO') formarketrisk,and liquidityandfundingrisk.These

Committees comprise senior management from throughout the Group. Credit Committees are supported by a dedicated Group Risk

Managementfunction,whichisheadedbyaGroupChiefRiskOfficer('CRO').AllkeyareasoftheGroupcontributetoandarerepresented

ontheALCOwhichissupportedbyGroupBalanceSheetManagement('GBSM').

GBSM isresponsible forthemanagementofbalancesheetriskswithparticularemphasisontheBank'scurrentandprojected liquidity,

interestrateandFXrisks.Balancesheetriskexposuresandrelatedissues,togetherwithmitigationstrategies,arereportedtotheALCO

andtheRiskandComplianceCommittees.GBSMisalsoresponsibleforensuringtheexecutionofapprovedstrategiesthroughFinancial

Markets.

TheCROreportsdirectlytotheGroupChiefExecutive,andalsohasindependentaccesstotheRiskandComplianceCommittee.TheCRO

was an external appointmentandjoinedthe Bank on 2 November2009. A furtherenhancementto the structure during 2009 was the

separationoftheCROandChiefFinancialOfficer('CFO')roles.InadditiontotheappointmentofanexternalcandidatetotheroleofCRO,

theBankalsoappointedanewexternalCFOin2010.

AuditCommittee

The Audit Committees role in the Risk Management Framework includes ensuring Group compliance with regulatory, prudential and

financialreportingresponsibilities. ItalsoreportstotheBoardontheeffectivenessofbothfinancialandnonfinancialcontrolprocesses

operating throughout the Group. The Committee is supported by Group Finance and Group Internal Audit, which are central control

functions independentofthebusinessunits.Group InternalAuditprovides independent,objectiveassuranceastowhethertheGroups

Risk

Management

and

Control

Framework

is

appropriate

and

functioning

effectively.

GroupRiskManagement

Managementofriskistheresponsibilityofstaffatalllevels.However,primaryresponsibilityformanagingriskandforensuringadequate

controlsareinplacelieswiththeGroupRiskManagementfunction.TheGroupRiskManagementfunctionisresponsiblefor:

SupportingseniormanagementandtheBoardinsettingtheGroupsriskappetiteandpolicies;

Supporting management in business decision making through independent and objective challenge to business unit

managementofriskandexposuresinlinewithagreedriskappetites;

Developingandcommunicatingriskmanagementpolicies,procedures,appetitesandaccountabilities;and

Analysing, monitoring and reporting risk management information across all risk types and geographies to

present an aggregated view of the Groups risk appetite to the senior management team and the Risk and Compliance

Committee.


15/52

AngloIrishBank

Pillar3Disclosures

15

During the year the Group Risk Management function initiated general improvements as part of an ongoing process review. Some

examplesinclude:

EnhancementofCreditQualityteamsandmonthlyAssetQualityforum;

Enhancedsensitivityanalysisforloanlossprojections;

Reviewof

data

capture

of

loan

account

information;

Qualitativeassessmentoftheregionalloanportfolios;and

EnhancementoftheStressTestingFramework.

3.3 RiskappetiteandstrategyRiskappetitecanbedefinedasthetotalamountofrisktheBankispreparedtoacceptinpursuitofitsstrategicobjectives.Thisisoutlined

indetailintheBank'sRiskAppetiteStatement.RiskappetitesetstheboundariesthatformadynamiclinkbetweentheBanksstrategy,

restructuringplan,capitalmanagementplanandtheriskmanagementframework.AsthestrategyoftheBankchanges,theappetitefor

riskisrevisitedtoconfirmthatitcontinuestosupporttheachievementoftheBanksobjectives.

TheBankscurrentriskexposureexceedsitsriskbearingcapacity.RiskreductionwillremainapriorityfortheBankbothintheshortand

mediumterm,

until

risk

exposure

is

in

line

with

the

Banks

risk

appetite

objective.

The

Board

plans

to

address

this

disparity

through

stabilising and derisking the Bank, while rebuilding confidence and trust with all stakeholders. In addition, the development and

implementation of the Banks restructuring plan, with leadership focused on ensuring timely execution of the plan and a return to

profitabilitywillassisttheBankinachievingitsriskappetiteobjective.

ThestrategyforriskmanagementistheresponsibilityoftheCRO.TheCROwillreviewthestrategyforriskmanagementgoingforwardin

conjunctionwiththeseniorriskmanagementteam,theseniormanagementteamandtheRiskandComplianceCommittee.

Scenariosandstresstesting

TheGroupusesstresstestingasanimportantinstrumentinthemeasurement,monitoring,managementandmitigationofitsindividual

risksasthesearise.However,arisingfromtheongoingfinancialcrisisandinlightofsignificantnewguidancefromregulatorybodiesthe

Bankrevised

its

Group

wide

Stress

Testing

Framework

in

2010.

This

revised

framework

addresses

all

regulatory

requirements

and

takes

cognisanceofregulatoryguidanceandbestpracticewhereidentified.TheGroupwideStressTestingFrameworkaddressestheriskstowhichtheBank isexposedarisingfrom itsdaytodayoperationsand

general business activities across the Group. Therefore, it applies to all of the Bank's business operations across all geographies and

capturesbothonbalancesheetandoffbalancesheetexposuresandtradingandhedgingpositionsoftheBank.

ThisGroupwidestresstestinganalysisisreferredtoascrossdivisionalanalysisofstresstesting.Thepurposeofthisanalysisistoensure

that the stress testing programme captures interrelationships and interdependencies between exposures, which may only become

apparentand/ormorepronouncedunderGroupwidestressedscenarios.

TheGroup'sstresstestingprogrammealsoaddressestherisksthatarisewithinaspecificriskcategory (e.g.creditriskormarketrisk),

withthis

referred

to

as

intra

divisional

risk

analysis.

These

risks

which

are

associated

with

the

normal

operation

of

banking

business,

are

addressed through their own separate policies. The Group utilises a variety of modelling approaches to its stress testing programme.

ThesemainlyincludetheScenarioApproachandtheSensitivityAnalysisApproach.EachofthemodellingapproachesusedbytheGroup

hasitsownmeritsanddemerits;hence,theadequacyoftheapproachesisreviewedbytheGrouponaregularbasis.

Thepracticalaspectsofthedesign, implementationandreportingoftheoutputofthestresstestingprogramme istheresponsibilityof

the Bank's senior management. The forum for this is the Bank's Internal Capital Adequacy Assessment Process ('ICAAP') Steering

Committee.Theresultsarepresentedtoseniormanagementonabiannualbasis.


16/52

AngloIrishBank

Pillar3Disclosures

16

4. MaterialBusinessRisks4.1 IndividualrisktypesIn

addition

to

the

principal

risks

and

uncertainties

identified

in

section

2,

which

include

general

macro

economic

conditions,

specific

risks

also arise from the use of financial instruments. The precise nature of all the risks and uncertainties that the Group faces cannot be

predictedandmanyoftheserisksareoutsideoftheGroupscontrol.InordertoeffectivelyminimisetheimpactoftheseriskstheBoardof

Directors(theBoard)hasestablishedariskmanagementframeworkcoveringaccountability,measurement,reportingandmanagement

ofriskthroughouttheGroup.InaccordancewiththewishesoftheShareholder,akeyobjectiveoverthecomingyearsistoreducetherisk

profile of the business. Management recognises the importance of the support functions of the Group Risk Management, Group

ComplianceandOperationalRisk,andGroupFinancewithintheBankinassistingwiththisprocess.

ThematerialrisksidentifiedbytheGroupinitsdaytodaybusinessare:

Creditrisk;

Liquidityandfundingrisk;

Market

risk;

Operationalrisk;and

Complianceandregulatoryrisk.

4.2 CreditriskCredit risk is the risk that the Group will suffer a financial loss from a counterpartys failure to pay interest, repay capital or meet a

commitmentandthecollateralpledgedassecurityisinsufficienttocoverthepaymentsdue.TheGroup'screditriskarisesprimarilyfrom

itslendingactivitiestocustomers(bankingcreditrisk)butalsofrominterbanklendingandrepurchaseagreements('repos'),investmentin

availableforsaledebtsecuritiesandderivativetransactions.Creditriskincludesthefollowingtypesofrisk:

Countryrisk istheriskof lossesarisingfromeconomicdifficultiesorpoliticalunrest inacountry, includingtheriskof losses

resultingfrom

nationalisation,

expropriation

and

debt

restructuring.

Settlement risk is the risk of loss when payments are settled e.g. payments for foreign currency transactions and the

purchaseorsaleofdebtsecurities.

Bankingcreditrisk

ItisthestatedaimoftheBanktoreducetheBankslendingcreditriskprofileaspertheRelationshipFrameworkbetweentheMinisterfor

FinanceandtheBank.TheBank'sparticipationinNAMAwasakeyelementinachievingthisobjective.Grossloanshavereducedby49%

in the period with 33.3bn of loans transferring to NAMA. Loans, gross of impairment provisions, at

31December2010total36.9bn.

TheGroup'spolicyonbankingcreditrisk issetoutinadetailedGroupCreditPolicy(the 'CreditPolicy')which isapprovedbytheBoard

followingrecommendation

by

the

Risk

and

Compliance

Committee.

It

has

been

framed

in

the

context

of

the

Bank's

present

position

in

termsofownership,Stateguaranteesandshort/mediumtermstrategy.ItisalsoconsistentwiththeBank'sRiskAppetitestatement.The

Credit Policy formsthe core of the Banks creditrisk ethosand represents a comprehensive guideto policies and underwritingcriteria

whichgovernthewayinwhichtheBankconductsitscreditbusinesswithafocusonrecoverymanagement.TheCreditPolicyalso:

setsouttheprocesssurroundingcreditapproval;

outlinesthemannerinwhichcreditriskismanaged;and

setsoutthecontextfortheBank'sbusinessandhowtheBankstrivestoreducerisk.

ConsistencyofapproachtobankingcreditriskacrosstheGroupisensuredthroughtheimplementationoftheCreditPolicyandpresence

of key personnel at all Credit Committee meetings. Credit Committee is the most senior forum for approving credit exposures and

consensusisrequiredbeforeauthorisingacreditexposurewitheachindividualcreditapplicationapprovedbyavalidquorumcomposed

of

business

and

risk

management

officers.


17/52

AngloIrishBank

Pillar3Disclosures

17

With regard to the Banks transaction approval and review processes, the Banking Credit Risk team, in conjunction with the Quality

Assurance team within Group Risk Management oversees the Credit Committee meetings and periodic loan reviews. Furthermore, to

monitor the ongoing quality of the loan book, the Banking Credit Risk team undertakes frequent asset quality reviews on significant

exposures.ThemonthlyPricingandAssetQualityCommitteemeetingconsidersmaterialpricemovementsandexternalratingchanges

forthedebtsecuritiesportfolio.Thelegacyportfolioofassetbackedsecuritieswassoldduring2010.

The independent credit teams within Group Risk Management monitor any treasury counterparty exposures which have materially

deterioratedincreditqualitysinceapproval.SuchexposuresarereportedtotheTreasuryCreditCommitteeonamonthlybasis,wherean

actionplanforeachcaseisagreed.Thismayinvolvecancellinglimitsoractivelymanagingdownorsellinganexposure.

To support customers that encounter financial difficulties the Bank has set up a dedicated unit, Group Recovery Management Unit

(GRMU),which is responsible forthe ongoing assessment and management of certain impaired exposures principally Irish impaired

loans.TheGRMU istargetdriven,withtheexpressedobjectiveofefficient impaired loanreductionandmaximising loanrecovery.The

unitmaintainsitsfocusthroughasystematicloanmanagementprocessthatformulatesworkplanstoachievetimelyresolution,andits

seniormanagementteamisactivelyinvolvedinallstagesoftheprocesstoensurethattheagreedplansforresolutionareachievedwithin

agreedtimeframes.

Creditrisk

relating

to

the

loan

book

is

identified

and

assessed

on

a

combination

of

top

down

and

bottom

up

risk

assessment

processes

on

aportfoliowidebasis.Topdownprocessesfocusonbroadrisktypesandcommonriskdrivers,ratherthanspecificindividualriskevents,

andadoptaforwardlookingviewofperceivedthreats.Bottomupriskassessmentisperformedonaloanbyloanbasis,focusingonrisk

eventsthathavebeenidentifiedthroughspecificqualitativeorquantitativemeasurementtools.InlinewiththeCreditPolicy,theBanking

Credit Risk team is taking steps to reduce concentration risk related to single counterparties and/or groups of closely related

counterparties.ThetopexposuresarereportedonamonthlybasistoseniormanagementandtheRiskandComplianceCommittee.

Theperformanceof individualfacilities iscloselymonitoredbyBankingCreditRiskonanongoingbasis,whichmaintainsa listoflower

qualitycases.Thesecases,whileconsideredlowerquality,arenotimpairedbutrequireincreasedmanagementattentiontopreventany

further deterioration in asset quality. Banking Credit Risk also maintains a list of satisfactory cases for exposures that continue to

representsatisfactoryquality loansbutwhicharesubjecttoclosermonitoring. Impaired loansare identifiedwhere 'objectiveevidence'

existsinaccordancewithIFRS.

Specificprovisionsarecreatedwhereoneormore losseventshavebeenrecognisedandasaresultashortfall isexpectedbetweenthe

Groupsexposureandthe likelyrecoverableamount.Therecoverableamount iscalculatedbydiscountingthevalueofexpectedfuture

cashflowsbytheexposuresoriginaleffectiveinterestrate.

An additional incurredbut notreported ('IBNR') collective provision iscreated to cover losses inherent inthe loan book wherethere is

objectiveevidencetosuggest that itcontains impaired loans,butthe individual impaired loanscannotyetbe identified.Thisprovision

takesaccountofobservabledataindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsfromagroupofloans

withsimilarcreditriskcharacteristics,althoughthedecreasecannotyetbeidentifiedwithintheindividualloansinthegroup.

This provision is calculated by applying incurred loss factors to groups of loans sharing common risk characteristics. Loss factors are

determinedbyhistorical loan lossexperienceasadjustedforcurrentobservablemarketdata.Adjustmentsreflecttheimpactofcurrent

conditions

that

did

not

affect

the

years

on

which

the

historical

loss

experience

is

based

and

remove

the

effects

of

conditions

in

the

historicalperiodthatdonotexistcurrently.Theprovisionamountisalsoadjustedtoreflecttheappropriatelossemergenceperiod.The

lossemergenceperiodrepresentsthetime ittakesfollowingaspecific losseventonan individual loan forthat loantobe identifiedas

impaired.Thelossemergenceperiodappliedintheperiodwassixmonths(31December2009:sixmonths).

Lending teams, in consultation with Banking Credit Risk, devise and implement action plans in order to minimise losses arising from

impaired loans. This may involve working with the borrower to achieve a satisfactory outcome for both the customer and the Bank.

However, incertaincircumstancesthe loanmayberepaidfromthesaleproceedsofsecurityheld,and/orbyavailingofrecoursetothe

guarantor.Wheretheproceedsfromcollateralarenotsufficienttorepaytheloan,BankingCreditRiskhastheauthoritytowriteoffthe

outstandingexposure.BankingCreditRiskwillmakethisdetermination,inlinewiththeCreditPolicy,onlywhenithasconcludedthatthe

likelihoodoffurtherrecoveryisremote.


18/52

AngloIrishBank

Pillar3Disclosures

18

Renegotiated loansarethosefacilitiesthat,duringthefinancialperiod,havehadtheirtermsrenegotiatedresultinginanupgradefrom

impairedtoperformingstatus.Thisupgradecanbebasedon,amongotherthings,subsequentgoodperformanceoranimprovementin

thecreditprofileoftheborrower.Renegotiatedloansandadvanceswere28masat31December2010(31December2009:66m).

TheGroupusesexternalratingsandmarketinformation,supplementedbyinternalanalysis,toassesstherisksassociatedwithtreasury

assets.

The

performance

of

all

assetbacked

securities

is

monitored

closely

through

monthly

trustee

reports

and

rating

agency

commentary.Impairmentismonitoredonamonthlybasisandrecognisedwhenthereisobjectiveevidencethataspecificfinancialasset

isimpaired. Arangeoffactorsareusedinrecognitionofimpairment,whichcanvarydependingonthenatureoftheunderlyingassetsor

collateralbutwilltypicallyincludeasignificantorprolongeddeclineinthefairvalueofthesecurity,thelevelofovercollateralisation,and

adversecreditratingsaction.

Counterparty credit exposure arising from derivative and repo transactions is calculated based on replacement cost methodology

involvingthe current contract value (markedto market)andanestimate of themaximumcostofrewritingthe contract within certain

confidencelevels.

Settlementriskonmanytransactions,particularlythoseinvolvingsecurities,issubstantiallymitigatedwheneffectedviaassuredpayment

systemsoronadeliveryversuspaymentbasis.Eachcounterparty'screditprofile isassessedandclearingagents,correspondentbanks

andcustodians

are

selected

with

a

view

to

minimising

settlement

risk.

The

most

significant

portion

of

the

Groups

settlement

risk

exposurearisesfromforeignexchangetransactions.Dailysettlementlimitsareestablishedforeachcounterpartytocovertheaggregate

ofallsettlementriskarisingfromforeignexchangetransactionsonasingleday.

ForthemajorityoftheGroup'sinterbankcounterparties,settlementriskiseffectivelyeliminatedthroughtheuseofContinuousLinked

Settlement('CLS').CLS isarealtime,globalsettlementsystemwhichminimisessettlementriskandisoperatedbyCLSBank,which is

supervisedandregulatedbytheUSFederalReserve.

GroupRiskManagementmonitorscountryriskexposures,takingintoconsiderationindependentcreditinformationfromwellestablished

internationalsources.

Collateral

TheacceptanceofbothfinancialandnonfinancialcollateraliscentraltotheriskmitigationandunderwritingpoliciesoftheGroup.The

natureofthecollateralheldwillreflectthetransactionbeingunderwritten.Loansandadvancestocustomersarecollateralisedprincipally

bychargesoverrealestateassets,businessassetsandliensoncashdeposits,andaresupplementedbypersonalguarantees.Inthecase

ofclientswithmorethanonetransaction,theBankseekstocrosscollateralisesecuritytostrengthenrepaymentcover.

Duetothecontinueddislocationinpropertymarketsandthelackoftransactionalactivityovertheperiod,itisimpracticablefortheBank

to obtain reliable fair values for individual collateral held against some past due or impaired financial assets as at 31 December 2010.

Howeverdeclinesinpricesofapproximately60%sincethemarketpeakforIrishcommercialpropertyreflectedincertainmarketindices

wouldappeartobeafairindicatorofthescaleofthedeclineincollateralvaluesoverthepasttwelvemonths.Ireland,whichrepresents

themajorityofimpairedandpastdueloanbalances,experiencedthemostsignificantdropinvaluationscomparedwithpricedeclinesin

theUKandUSmarkets.

During2010,theUKpropertymarkethasseenincreasedtransactionvolumes,particularlyinLondonandtheSouthEast.However,there

continuestobedislocationbetweenprimeassetsandthemarketforsecondaryandtertiaryassets,wherepropertyyieldshavewidened

and demand has been weak. Therefore it is difficult to obtain reliable fair values for individual collateral held against UK past due or

impairedassets.

DuringtheyeartheGrouprepossessedcollateral,consistingof landandproperty,equitiesandcash,of52monbalancesof350m(31

December2009:6monbalancesof20m).ItistheGroupspolicytodisposeofrepossessedassetsinanorderlyfashion.Theproceeds

are used to reduce or repay the outstanding balance. The Group does not use repossessed assets for business purposes. A specific

foreclosureprocesshasbeenputinplaceintheUStoallowtheBanktorepossesscollateralinanefficientandeffectivemanneracrossall

USjurisdictions.

The

Group

has

executed

Collateral

Support

Agreements

('CSAs')

with

its

principal

interbank

derivatives

counterparties.

Under

the

terms

ofaCSA, iftheaggregatemarket valueofasetofderivativecontractsbetweentwopartiesexceedsanagreedthresholdamount,the


19/52

AngloIrishBank

Pillar3Disclosures

19

party which would be exposed to loss in the event of default receives a deposit of cash equal to the excess aggregate value over the

threshold.Correlationor'wrongway'riskislargelymitigatedascollateralreceivedisexclusivelycash.UndercertainCSAagreements,the

Grouphasposted initialamounts,theeffectofwhichforthecounterpartyisovercollateralisingitsexposure.TheGrouphasadditional

creditriskontheinitialamountsandcouldsufferfinanciallossintheeventofacounterpartydefault.

Nettingarrangements

TheGrouphasenteredintomasternettingagreementswithcounterpartieswithwhichitundertakesasignificantamountoftransactions,

primarilyintheinterbankmarketsforderivativeinstrumentsandrepurchasetransactions.Asthesetransactionsusuallysettleonagross

basis,theabilitytosettleonanetbasisintheeventofadefaultsubstantiallyreducestheoverallcreditrisk.

4.3 LiquidityandfundingriskLiquidity and funding risk is the risk that the Group does not have sufficient financial resources available at all times to meet its

contractualandcontingentcashflowobligationsorcanonlysecuretheseresourcesatexcessivecost.

Thecurrentobjectiveforthemanagementof liquidityandfundingriskistocontinuetomeetcashflowobligationsastheyfalldueand

minimisethe

funding

required

from

our

stakeholders.

The

future

funding

and

liquidity

strategy

and

balance

sheet

structure

will

be

largely

reliantonourstakeholderandtherelevantauthorities.ThiswilltakeintoaccountthelongtermbestinterestsofthewiderIrishbanking

sectorinamannerconsistentwiththeEU/IMFProgrammefortheRecoveryoftheIrishBankingsystem.

Fundingmarkets,bothretailandwholesale,haveremainedchallengingfortheGroupwithBankandcountryspecificconcernshavinga

significantadverseeffect.Themarketforcustomerdepositsremainedextremelycompetitive,particularlytheretaildepositmarketwhere

pricingpressuremadedepositretentiondifficult.Since31December2009thequantityandqualityoftheBanksfundinghascontinuedto

deteriorate resulting in an increased reliance on support from central banks, including access to special funding facilities. Customer

depositshavedecreasedby16.1bnovertheyear,ofwhichsterlingcustomerdepositshavedecreasedby7.3bnandUSdollarby$0.9bn.

On24February2011,underpowersgrantedbytheCredit Institutions (Stabilisation)Act2010,aTransferOrderwasmadebytheHigh

Court,andtheBanktransferredthemajorityof its IrishandUKcustomerdepositsandthe IsleofMandeposittakingbusinesstoAllied

IrishBanks,p.l.c.

The Groupcurrently borrows from central banks through bothopen market operationswith monetary authorities andthroughspecial

funding facilities with the Central Bank of Ireland. The Group has total borrowings from central banks at

31 December 2010 of 45.0bn (31 December 2009: 23.7bn), including 28.1bn (31 December 2009: 11.5bn) borrowed through these

specialfundingfacilities.

StructuralforeignexchangeriskprincipallyarisesfromthefundingshortfallbetweentheGroup'ssterlingandUSdollarlendingactivities

andtheGroup's funding in thosecurrencies. The depositoutflow in noneuro currencies has increased this funding shortfall whichhas

beenreplacedthroughusingforwardforeignexchangehedging.Theavailabilityofcounterpartylineshasreducedinthepastyearanditis

the subject of ongoing management through the Financial Markets Division in conjunction with the authorities and the Group's

stakeholders.

Thelong

term

foreign

exchange

swap

agreement

executed

with

the

NTMA

in

March

2011

has

led

to

a

significant

improvement

in

the

Group'sUSdollarfunding.ThistransactionhasprovidedUSdollarfundinginexchangeforeurosandreducedtherequirementtosource

USdollarsintheinterbankorwholesaleforeignexchangemarkets.

InNovember2010,theMinisterforFinanceputinplaceaguaranteefortheBankwhichcoveredamountspayableinrelationtoderivative

and certain other interbank transactions. In accordance with the terms of this guarantee, the Bank may only enter into derivative

transactionsforbalancesheetmanagementpurposes.Thereisnofeepayableforthisguarantee.

InthecontextofliquidityandfundingrisktheBankactivelymonitorscompliancewiththecontractualcovenantscontainedintheGroups

debt securities programmes and subordinated capital instruments. Significantly the Credit Institutions (Stabilisation) Act 2010 (the

StabilisationAct)includesimportantprovisionsthataredesignedtopreventapotentialeventofdefaultbecomingapplicablebecauseof

anorderorrequirementmadeundertheStabilisationActoranythingdoneonfootofsuchanorderorrequirement.


20/52

AngloIrishBank

Pillar3Disclosures

20

LiquidityandfundingriskismonitoredcentrallybyALCO,whoseresponsibilitiesinrelationtoliquidityinclude,butarenotlimitedto:

ProvidingtheBoardandrelevantBoardCommitteeswithregularliquidityupdates;

SettingliquidityriskstrategyfortheGroup;

SettingliquidityriskappetitefortheGroup;

Approvingand

maintaining

Group

funding

and

liquidity

policy;

ApprovingandmaintainingtheGroupcontingencyfundingplan;

Maintaininginternalandexternalliquidityrisklimits;and

Liquiditystresstestingandscenarioanalysis.

GroupLiquidityPolicydetailstheBanksriskpolicyrelatingtoallfundingandliquiditymatters.ThepolicydocumentarticulatestheRisk

AppetiteassetandapprovedbytheBoardandhowALCOmanagesthiswithintheparameters.Thepolicydocumentformallydescribes

the liquidity governance structure and control framework to monitor and control liquidity risk within the Group. The Group Liquidity

PolicyprovidesdetailontheliquiditystresstestingthatisconductedandremainsakeypillarofhowtheGroupanalysesandassessesits

liquidityriskexposures.TheGroupLiquidityPolicyismonitoredbyGroupRiskbutownedbyALCOwhichhasdelegatedresponsibilityfor

liquiditymanagementfromtheBoard.

ALCOis

responsible

for

structural

liquidity

risk

management

and

provides

regular

formal

updates

to

the

Risk

and

Compliance

Committee

andtheBoard.TheFinancialMarketsdivisionhasdelegatedresponsibilityforthemanagementofoperationalliquidityriskunderagreed

limitssetandapprovedbyALCO.

Operationalliquidityriskisshorttermliquidityrisk,rangingfromintradaytoonemonth.ExecutionoftheGroup'sshorttermoperational

liquiditystrategyandcash flowmanagementonadailyandrealtime intradaybasis is theresponsibilityofFinancialMarketsdivision,

operatingwithinpolicysetbyALCO.Cashflowrequirementsaredeterminedusingcontractualcashflowsandconservativeassumptions

fornoncontractualcashflowswhichmayfalldue.

Structural liquidityrisk ismanagedundertheguidelinessetout intheGroupfundingpolicy.GBSMandGroupRiskprovideupdatesto

ALCOonthestructuralliquidityandfundingpositionbothonacurrentandforwardlookingbasis.

Thestructural

liquidity

risk

has

been

materially

altered

by

the

deposit

transfer

transaction

in

February

2011

and

the

US

dollar/euro

foreign

exchange swap agreement. The deposit transfer has significantly reduced the amount of customer deposit liabilities and reduced the

amountofNAMAbondsontheBank'sbalancesheet.Thishasledtoanincrease inthenominalamountof,andthefuturerelianceon,

liquidity assistance from the Central Bank of Ireland. The US dollar/euro forward exchange agreement has positively improved the

structuralforeignexchangeshortfallinUSdollarsbyprovidingtermUSdollarfundingwithoutrecoursetowholesalemarkets.

Liquidityrisk ismeasuredusingthecash flowmismatchapproachwherecash inflowsandoutflowsareanalysedtoproduceanetcash

flowpositionoversettimeperiods.Cashoutflowsareassumedtobepaidattheearliesttimeperiodandcashinflowstobereceivedatthe

latest potential time period. Separate liquidity cash flow limits are in place for the management of liquidity in noneuro currencies

ensuringforeigncurrencycashflowexposureismanagedwithinapprovedrisktolerancelimits.

The Group evaluates its longer term liquidity mismatch or structural liquidity risk on a regular basis. The management of structural

liquidityrisk

is

important

in

identifying

future

funding

requirements.

It

is

accepted

that

the

current

liquidity

and

funding

risk

position

is

significantly outside the risk appetite parameters. The Bank will continue to manage and monitor this risk, whilst acknowledging that

opportunitiestoreduceitarelimitedduetothecurrentpositionoftheBank.

An important part of the operational and structural liquidity risk strategy is maintaining a portfolio of liquid treasury assets which are

realisableforcashatshortnoticethroughsaleandrepurchaseagreements.TheGroup'sportfolioofliquidassetscomprisesgovernment

bondsandotherhighqualitybankpaperwhichareliquidinthebilateralortripartyrepomarket.

Holding a portfolio of highly liquid assets has always formed part of the Group's liquidity management policy, assisting the Group in

receivingandplacingcashintherepomarketduringperiodsofmarketvolatility.Giventhestressedfundingandliquiditypositionofthe

Bankvirtuallyalloftheliquidassetportfolioiscurrentlyunderrepurchaseagreements.


21/52

AngloIrishBank

Pillar3Disclosures

21

Stresstesting

Animportantelementintheidentification,managementandcontrolofliquidityriskistheuseofstresstestsandscenarioanalyses.The

stresstestingresultsenableALCOtoanalysetheeffectsofvariousscenariosonthefundingandliquiditypositionoftheGroup.Thesuite

ofstresstestsincorporatesbothmarketandGroupspecificstressesincludingmoderateandsevereeventsoverdifferenttimehorizons.

Someexamplesoftheprimarystresstestsarethetotalclosureofwholesalefundingmarkets,twonotchdowngradestress,Irishmarket

specificstressandmarketriskstress.InJune2010threeadditionalstresseswereaddedtotheliquiditystresstestingsuiteaspartofthe

Committee of European Bank Supervisors ('CEBS') Guidelines on Liquidity Buffers and Survival periods. These stress test results are

formallysubmittedtotheCentralBankofIrelandonamonthlybasis.

Liquidity stress testing results are regularly reviewed by ALCO with updates provided to the Board and the Risk and Compliance

Committee.

Regulatoryliquidity

The CentralBank of Ireland introducednewregulatory liquidity requirements in 2007,replacingthe liquid stock approach with amore

advancedcash

flow

mismatch

approach.

Irish

banks

are

required

to

report

coverage

in

the

0

to

8

day

and

9

to

30

day

periods

against

which

regulatorylimitsaresetwithconservativeassumptionsforcertaincashflowtypes.Inaddition,theCentralBankofIrelandsetsqualitative

requirementsregardedasbestpracticeforliquidityriskmanagement.

Due to the continued deterioration of its funding base, the Bank is not in full compliance with a number of regulatory liquidity

requirements.

4.4 MarketriskMarketriskistheriskofapotentialadversechangeintheGroupsincomeorfinancialpositionarisingfrommovementsininterestrates,

exchangeratesorothermarketprices.Marketriskarisesfromthestructureofthebalancesheet,theexecutionofcustomerandinterbank

business and from trading activities. The Group aims to have effective systems and methodologies for the identification and

measurementof

market

risks

in

its

balance

sheet.

These

risks

are

then

managed

within

strict

limits

and

in

the

context

of

a

conservative

riskappetitelevelthatisconsistentwiththesupportprovidedtotheGroupbytheIrishGovernment.

TheGroup'sexposuretomarketriskisgovernedbypoliciesapprovedbytheRiskandComplianceCommittee,andoverseenbyALCO.All

risklimitsareapprovedbyALCOandtheRiskandComplianceCommittee.

ExposuretomarketriskispermittedonlyinspecificallydesignatedbusinessunitsandiscentrallymanagedbyFinancialMarkets.Inother

units,marketriskiseliminatedbywayofappropriatehedgingarrangementswithFinancialMarkets.MarketriskthroughouttheGroupis

measuredandmonitored byGroup RiskManagement,operating independentlyof thebusinessunits.Themarketrisks inherent inthe

Group's balance sheet, and the risks arising from the flow of customer business, require management on a daily and intraday basis.

Hedgingtowithinapprovedmarketrisklimitsistheoverridingrequirementinriskmitigation.

Tradingbook

risk

The trading book consists of positions arising primarily from client transactions in a range of financial instruments. The interest rate

trading book includes interest rate swaps, currency swaps, interest rate futures, forward rate agreements and options. Traded foreign

exchangeriskarisesfromtheGroupslendingandfundingactivitiesaswellasfromitscorporateandinterbankforeignexchangebusiness.

AlltradingbookrisksaremanagedcentrallybyFinancialMarkets.TheGroupaimstomanagetherisksarising fromclienttransactions

through the use of derivative instruments within a detailed framework of approved limits that reflects the orientation towards the

management of risks within the existing balance sheet and those deriving from customer business. The Bank's Group Treasury Policy

prescribesvaluation modelsandriskmeasurement methodologiesthat ensureclose monitoringandclearreportingofalltrading book

risks.

TheprimarytradingbookmarketriskmeasureisaValueatRisk('VaR')modelthatisbasedonahistoricalsimulationmethodology.Itis

implementedusing

a

99%

confidence

level

and

two

years

of

historic

data.

The

methodology

takes

into

account

inter

relationships


22/52

AngloIrishBank

Pillar3Disclosures

22

betweendifferentmarketvariables,forinstancebetweeninterestratesandforeignexchangerates,andcapturestherisksassociatedwith

optionpositionsininterestrateandforeignexchangeinstruments.

Althoughanimportantandindustrystandardmeasureofrisk,VaRhasitslimitationsasaresultofitsuseofhistoricaldata,frequencyof

calculationandholdingperiods.Additionally,theuseofconfidence intervalsdoesnotgiveany informationaboutpotentiallosseswhen

theconfidence

level

is

exceeded.

For

these

reasons,

the

Group

also

uses

a

variety

of

other

methodologies

in

measuring

market

risk.

These

include,butarenotlimitedto,stresstestingandsensitivityanalysis.

GroupRiskManagementprovidesdailyreportingoftradingbookriskpositionsagainstallapprovedVaR,PresentValueofaBasisPoint

('PVBP'), option sensitivity and stoploss limits. It provides monthly reporting to ALCO on trading book activity with analysis of all

significantriskpositions,includingstresstestingofpositionsagainstarangeofextrememarketscenarios.Thereisalsomonthlyreporting

totheRiskandComplianceCommitteeoncompliancewithrisklimits.

TheGroupTreasuryPolicyoutlinesarigorouscontrolenvironmentthatincludesprescribingaspecificrangeofapprovedproductsbydesk

in accordance with experience and specialisation. It also provides for a structure for the management of trading book risk positions

throughadetailedsetoflimitsthatcoversalloftherisksensitivitiesassociatedwiththeapprovedproducts.

Theaverage

VaR

for

the

year

ended

31

December

2010

was

lower

than

for

the

previous

period.

Risk

positioning

continued

to

be

low

in

2010intermsofinterestrateandforeignexchangerisksensitivities.

Bankingbookriskinterestraterisk

Interestraterisk istheriskofapotentialadversechange intheGroup's incomeorfinancialpositionarisingfrommovementsin interest

rates.Itarisesfromthestructureofthebalancesheetandfromtheexecutionofcustomerandinterbankbusiness.

Bankingbookpositionsarethoseacquiredwiththeintentionofholdingthemtomaturityinthenormalcourseofbusiness.Interestrate

riskinthebankingbookarisesfromacombinationoflending,fundingandnontradingtreasuryactivities.FinancialMarketsmanagesthe

marketriskassociatedwithalloftheseactivitiesonaconsolidatedbasis.

TheGroup's

financial

assets

and

liabilities

have

interest

rates

that

are

reset

at

different

times

or

under

different

bases.

There

is

a

potential

impactonearningsandvaluethatcouldoccurwhenliabilitiescannotberepricedasquicklyasassetsinafallinginterestrateenvironment

orwhenassetscannotberepricedasquicklyasliabilitiesinanenvironmentofrisingrates.

At 31 December 2010, the Group held a 25.3bn Irish Government promissory note. As the promissory note is a fixed rate instrument

whichcreatessignificantinterestrateriskexposure,whichinturnleadstopotentialearningsvolatility,theBankhashedgedaportionof

theexposure.TheBankhashedgedatotalof4.6bnofthenoteusinginterestrateswaps,andafurther6.1bnofeconomichedgesexist

intheformoftheGroupscapitalandfixedratedebtissuance.However,significantfixedrateexposureremains,andwithcurrentmarket

conditionsthereislimitedcapacitytohedgefurtheramountswithmarketcounterparties.

As a result of the unhedged fixed interest rate exposure on the promissory note, a +/ 1% parallel shift in interest rates over a twelve

monthperiodwouldimpactnetinterestincomeandprofitbeforetaxby/+146m.TheGrouprecognisesthattheeffectivemanagement

ofinterest

rate

risk

is

essential

to

the

maintenance

of

stable

earnings

and

the

preservation

of

shareholder

value.

It

aims

to

manage

interestrateriskinitsbalancesheettooptimisenetinterestincomewithinanacceptablelosstolerancelevel.

TheGroupTreasuryPolicyprovidesforconsolidatedreportingandcentralisedmanagementofallbankingbookriskpositionswithinthe

Group.TheGroup'sexposuretointerestrateriskisgovernedbypoliciesapprovedbyALCOandtheRiskandComplianceCommittee.All

risklimitsareapprovedbyALCOandtheRiskandComplianceCommittee.TheFinancialMarketsdivisionandGBSMhaveresponsibility

forthemanageme

Anglo Pillar 3 Disclosures 2010

Documents

Transcript of Anglo Pillar 3 Disclosures 2010