The Treasury Function of FCA Bank coordinates the operational activities of treasury and financing for all Group Companies. Such coordination is accomplished in accordance with the Group Risk Management Policies, emanated by the Board of Directors, which determine, the objectives, instruments and limits in the assumption of risks in:
- Interest rate
- Exchange rate
Interest rate risk management
Interest rate risk results from the fact that the portfolio of subsidiaries is composed primarily of fixed rate assets - Retail Financing and Rental - while the overall Group debt is composed of sources of both variable and fixed rate financing..
To manage this type of risk, we intervene to protect the consolidated financial margin from impacts due to changes in interest rates, aligning the maturity profile of liabilities (determined on the basis of the date of recalculation of the interest rates) to the expiry profile of the active portfolio. To this end, we use derivative agreements designed to neutralize the risks due to increase variations in interest and exchange rates. The following methods are used to calculate the interest rate risk exposure:
- Reset Gap Analysis: identifies the difference between the amount of assets and liabilities having a date reset in the same time interval;
- Duration Analysis: identifies the difference between the financial duration per reset date for the assets and liabilities.
In order to ensure compliance with the limits imposed by the Group Risk Management Policies, the Treasury Function uses a combination of derivative instruments (such as Interest Rate Swap and Forward Rate Agreement) in order to adequately amend the misalignments above.We have adopted a type of coverage called Fair Value Hedge since 1/1/2007. Such treatment is not, however, applied to financial derivatives concluded to cover the debt of companies engaged in Rental activities, for which a form of coverage called Cash Flow Hedge continues to be used.
Exchange rate risk management
The exchange rate risk concerns portfolios in currencies other than Euro and refinanced in Euro.
The exposure to exchange rate risk arises from a mismatch of foreign currency assets and liabilities and is proportionate to the net between assets and liabilities denominated in currencies other than the Euro. Such exposure is covered by derivatives such as Cross Currency Swap and completed deeds of sale (Foreign Exchange Swaps). The policies provide full coverage of this type of exposure and therefore foreign exchange transactions are allowed only for risk hedging.
Management of counterparty and liquidity risk
Counterparty risk concerns only deposit and derivative operations concluded with third counterparties, while the liquidity risk is potentially connected with possible refinancing of the funding under competitive terms, in the event of a reduction in the duration of funding. We do not use hedging instruments for counterparty risk and liquidity risks. The Company works, as indicated in the Risk Management policies, within strict rating, amount and duration of exposure limits, using appropriate credit lines. Exposure to counterparty risk is minimised through the use of derivative standard agreements (ISDA) and very short-term liquidity investments, limiting operational procedures to those counterparties which have primary standing and which possess adequate rating, according to the criteria defined by the Group Risk Management Policies. .
With regard to the management of liquidity risk, our aim is to fully finance the activities that are due for each time interval, while maintaining a consistent liquidity basis through a combination of cash and lines of credit.
In addition, the Group can count, as provided for by contract, on the possibility of financing by its banking partner Crédit Agricole Consumer Finance to cover its needs in order to substantially eliminate the risk of refinancing.