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Notes to the consolidated fnancial statements (continued)

for the year ended 30 June 2011

34. Group risk management (continued)

34.4 Banking risk management for fnancial instruments (continued)

34.4.3 Market risk (continued)

(c) Non-traded interest risk (continued)

Present value sensitivity including off-balance sheet positions

The Bank also periodically prepares a value at risk type analysis to value asset, liability and off-balance sheet positions under a range of possible interest rate scenarios. Value at risk provides information on the potential adverse change that could occur to the present value of assets and liabilities under a range of possible interest rate scenarios where repricing dates do not match. The interest rate scenarios are derived from actual interest rate movements that have occurred over discrete three-month and two-year historical observation periods. A 97.5% confdence level and a one-month holding period are used for the simulation. The information is based on contractual repricing information.

BANKING

Change in net interest income p.a. 2011 2010 $m $m

Banking non-traded interest rate risk exposure – VaR analysis for sensitivity of net interest income from asset, liability and off-balance sheet positions based on 97.5% confdence interval

Exposure at end of fnancial year 6 29 Average monthly exposure during the fnancial year 8 32 High month exposure during the fnancial year 16 56 Low month exposure during the fnancial year – 10

(d) Non-traded foreign exchange risk

Non-traded foreign exchange risk arises where investments in non-Australian operations expose current and future earnings to movements in foreign exchange rates. The objective of foreign currency exchange risk management is to minimise the impact on earnings of any such movements. The policy is to fully hedge any such exposure and accordingly minimise exposure to the risk. All offshore borrowing facilities arranged as part of the overall funding diversifcation process have been economically hedged in respect of their potential foreign exchange risk through the use of derivative fnancial instruments (refer note 34.7).

34.5 Life risk management for fnancial instruments

34.5.1 Credit risk

Life is exposed to and manages the following key sources of credit risk.

KEY SOURCES OF CREDIT RISK HOW ARE THESE MANAGED

Investments in fnancial instruments

Financial instruments are only dealt on recognised exchanges and over-the-counter contracts. The counterparties to over-the-counter contracts are limited to companies with primarily investment grade credit ratings from a recognised credit rating agency and are normally banks operating in Australia. Credit management (credit rating and credit limit controls), and counterparty diversifcation policies are in place to limit exposure to any one counterparty as a proportion of the investment portfolio.

Reinsurance recoveries Credit risk with respect to reinsurance programs is minimised by placement of cover with a number of

reinsurers with strong credit ratings.

The carrying amount of the relevant asset classes in the statement of fnancial position represents the maximum amount of credit exposures as at the end of the fnancial year, except for derivatives. The fair value of derivatives recognised in the statement of fnancial position represents the current risk exposure, but not the maximum risk exposure. The nominal value and fair value of derivatives are illustrated in note 8.3.