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Fair value of financial instruments | 12 Months Ended
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Dec. 31, 2011
Fair value of financial instruments |
| 22. | Fair value of financial instruments
The Bank determines the fair value of its financial instruments using the fair value hierarchy established in ASC Topic 820 - Fair Value Measurements and Disclosure, which requires the Bank to maximize the use of observable inputs (those that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market information obtained from sources independent of the reporting entity) and to minimize the use of unobservable inputs (those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances) when measuring fair value. Fair value is used on a recurring basis to measure assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets and liabilities for impairment or for disclosure purposes. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Bank uses some valuation techniques and assumptions when estimating fair value. The Bank applied the following fair value hierarchy: Level 1 – Assets or liabilities for which an identical instrument is traded in an active market, such as publicly-traded instruments or futures contracts. Level 2 – Assets or liabilities valued based on observable market data for similar instruments, quoted prices in markets that are not active; or other observable inputs that can be corroborated by observable market data for substantially the full term of the asset or liability. Level 3 – Assets or liabilities for which significant valuation assumptions are not readily observable in the market; instruments measured based on the best available information, which might include some internally-developed data, and considers risk premiums that a market participant would require. When determining the fair value measurements for assets and liabilities that are required or permitted to be recorded at fair value, the Bank considers the principal or most advantageous market in which it would transact and considers the assumptions that market participants would use when pricing the asset or liability. When possible, the Bank uses active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Bank uses observable market information for similar assets and liabilities. However, certain assets and liabilities are not actively traded in observable markets and the Bank must use alternative valuation techniques to determine the fair value measurement. The frequency of transactions, the size of the bid-ask spread and the size of the investment are factors considered in determining the liquidity of markets and the relevance of observed prices in those markets. When there has been a significant decrease in the volume or level of activity for a financial asset or liability, the Bank uses the present value technique which considers market information to determine a representative fair value in usual market conditions. A description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis, including the general classification of such assets and liabilities under the fair value hierarchy is presented below: Trading assets and liabilities and securities available-for-sale When quoted prices are available in an active market, available-for-sale securities and trading assets and liabilities are classified in level 1 of the fair value hierarchy. If quoted market prices are not available or they are available in markets that are not active, then fair values are estimated based upon quoted prices of similar instruments, or where these are not available, by using internal valuation techniques, principally discounted cash flows models. Such securities are classified within level 2 of the fair value hierarchy. Investment fund The Fund is not traded in an active market and, therefore, representative market quotes are not readily available. Its fair value is adjusted on a monthly basis based on its financial results, its operating performance, its liquidity and the fair value of its long and short investment portfolio that are quoted and traded in active markets. Such investment is classified within level 2 of the fair value hierarchy. Derivative financial instruments The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instrument. Exchange-traded derivatives that are valued using quoted prices are classified within level 1 of the fair value hierarchy. For those derivative contracts without quoted market prices, fair value is based on internal valuation techniques using inputs that are readily observable and that can be validated by information available in the market. The principal technique used to value these instruments is the discounted cash flows model and the key inputs considered in this technique include interest rate yield curves and foreign exchange rates. These derivatives are classified within level 2 of the fair value hierarchy. Adjustments for credit risk of the counterparty are applied to those derivative financial instruments where the internal credit risk rating of said counterparties deviates substantially from the credit risk implied by the London Interbank Offered rate (“LIBOR”). Not all counterparties have the same credit rating that is implicit in the LIBOR curve; therefore, it is necessary to take into account the current credit rating of the counterparty for the purpose of obtaining the true fair value of a particular instrument. In addition, adjustments to bilateral or own risk are adjusted to reflect the bank’s credit risk when measuring all liabilities at fair value. The methodology is consistent with the adjustments applied to generate the counterparty credit risk. Financial instruments measured at fair value on a recurring basis by caption on the consolidated balance sheets using the fair value hierarchy are described below:
|  | 2011 |
(In thousands of US$) |  |  |  |  |  |  |  | Internally |  |  |  |
|  |  |  |  | Internally developed |  |  | developed models |  |  |  |
|  |  |  |  | models with |  |  | with significant |  |  |  |
|  | Quoted market |  |  | significant |  |  | unobservable |  |  | Total carrying |
|  | prices in an active |  |  | observable market |  |  | market |  |  | value in the |
|  | market |  |  | information |  |  | information |  |  | consolidated |
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | balance sheets |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Trading assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sovereign bonds |  |  | 20,415 |  |  |  | - |  |  |  | - |  |  |  | 20,415 |
Cross-currency interest rate swaps |  |  | - |  |  |  | 21 |  |  |  | - |  |  |  | 21 |
Total trading assets |  |  | 20,415 |  |  |  | 21 |  |  |  | - |  |  |  | 20,436 |
Securities available –for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt |  |  | 87,198 |  |  |  | - |  |  |  | - |  |  |  | 87,198 |
Sovereign debt |  |  | 328,544 |  |  |  | 558 |  |  |  | - |  |  |  | 329,102 |
Total securities available-for-sale |  |  | 415,742 |  |  |  | 558 |  |  |  | - |  |  |  | 416,300 |
Investment fund |  |  | - |  |  |  | 120,425 |  |  |  | - |  |  |  | 120,425 |
Derivative financial instruments - receivable |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | - |  |  |  | 16 |  |  |  | - |  |  |  | 16 |
Cross-currency interest rate swaps |  |  | - |  |  |  | 3,605 |  |  |  | - |  |  |  | 3,605 |
Forward foreign exchange |  |  | - |  |  |  | 538 |  |  |  | - |  |  |  | 538 |
Total derivative financial instruments - receivable |  |  | - |  |  |  | 4,159 |  |  |  | - |  |  |  | 4,159 |
Total assets at fair value |  |  | 436,157 |  |  |  | 125,163 |  |  |  | - |  |  |  | 561,320 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Trading liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | - |  |  |  | 748 |  |  |  | - |  |  |  | 748 |
Cross-currency interest rate swaps |  |  | - |  |  |  | 4,836 |  |  |  | - |  |  |  | 4,836 |
Total trading liabilities |  |  | - |  |  |  | 5,584 |  |  |  | - |  |  |  | 5,584 |
Derivative financial instruments - payable |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | - |  |  |  | 10,829 |  |  |  | - |  |  |  | 10,829 |
Cross-currency interest rate swaps |  |  | - |  |  |  | 40,574 |  |  |  | - |  |  |  | 40,574 |
Forward foreign exchange |  |  | - |  |  |  | 2,339 |  |  |  | - |  |  |  | 2,339 |
Total derivative financial instruments - payable |  |  | - |  |  |  | 53,742 |  |  |  | - |  |  |  | 53,742 |
Total liabilities at fair value |  |  | - |  |  |  | 59,326 |  |  |  | - |  |  |  | 59,326 |
|  | 2010 |
(In thousands of US$) |  |  |  |  |  |  |  | Internally |  |  |  |
|  |  |  |  | Internally developed |  |  | developed models |  |  |  |
|  |  |  |  | models with |  |  | with significant |  |  |  |
|  | Quoted market |  |  | significant |  |  | unobservable |  |  | Total carrying |
|  | prices in an active |  |  | observable market |  |  | market |  |  | value in the |
|  | market |  |  | information |  |  | information |  |  | consolidated |
|  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | balance sheets |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Trading assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sovereign bonds |  |  | 45,058 |  |  |  | - |  |  |  | - |  |  |  | 45,058 |
Corporate bonds |  |  | 5,354 |  |  |  | - |  |  |  | - |  |  |  | 5,354 |
Total trading assets |  |  | 50,412 |  |  |  | - |  |  |  | - |  |  |  | 50,412 |
Securities available –for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt |  |  | 67,888 |  |  |  | - |  |  |  | - |  |  |  | 67,888 |
Sovereign debt |  |  | 285,362 |  |  |  | - |  |  |  | - |  |  |  | 285,362 |
Total securities available-for-sale |  |  | 353,250 |  |  |  | - |  |  |  | - |  |  |  | 353,250 |
Investment fund |  |  | - |  |  |  | 167,291 |  |  |  | - |  |  |  | 167,291 |
Derivative financial instruments - receivable |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | - |  |  |  | 591 |  |  |  | - |  |  |  | 591 |
Cross-currency interest rate swaps |  |  | - |  |  |  | 1,431 |  |  |  | - |  |  |  | 1,431 |
Forward foreign exchange |  |  | - |  |  |  | 81 |  |  |  | - |  |  |  | 81 |
Total derivative financial instruments - receivable |  |  | - |  |  |  | 2,103 |  |  |  | - |  |  |  | 2,103 |
Total assets at fair value |  |  | 403,662 |  |  |  | 169,394 |  |  |  | - |  |  |  | 573,056 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Trading liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | - |  |  |  | 3,031 |  |  |  | - |  |  |  | 3,031 |
Cross-currency interest rate swaps |  |  | - |  |  |  | 907 |  |  |  | - |  |  |  | 907 |
Total trading liabilities |  |  | - |  |  |  | 3,938 |  |  |  | - |  |  |  | 3,938 |
Derivative financial instruments - payable |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | - |  |  |  | 27,236 |  |  |  | - |  |  |  | 27,236 |
Cross-currency interest rate swaps |  |  | - |  |  |  | 25,781 |  |  |  | - |  |  |  | 25,781 |
Forward foreign exchange |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | 12 |
Total derivative financial instruments - payable |  |  | - |  |  |  | 53,029 |  |  |  | - |  |  |  | 53,029 |
Total liabilities at fair value |  |  | - |  |  |  | 56,967 |  |  |  | - |  |  |  | 56,967 |
ASC Topic 825 - Financial Instruments requires disclosure of fair value of financial instruments including those assets and liabilities for which the Bank did not elect the fair value option. Bank’s management uses its best judgment in estimating the fair value of the Bank’s financial instruments; however, there are limitations in any estimation technique. The estimated fair value amounts have been measured as of their respective year-ends, and have not been re-expressed or updated subsequent to the dates of these consolidated financial statements. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end. The following information should not be interpreted as an estimate of the fair value of the Bank. Fair value calculations are only provided for a limited portion of the Bank’s financial assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparison of fair value information of the Bank and other companies may not be meaningful for comparative analysis. The following methods and assumptions were used by the Bank’s management in estimating the fair values of financial instruments whose fair value are not measured on a recurring basis: Financial instruments with carrying value that approximates fair value The carrying value of certain financial assets, including cash and due from banks, interest-bearing deposits in banks, customers’ liabilities under acceptances, accrued interest receivable and certain financial liabilities including customer’s demand and time deposits, securities sold under repurchase agreements, accrued interest payable, and acceptances outstanding, as a result of their short-term nature, are considered to approximate fair value. Securities held-to-maturity The fair value has been based upon current market quotations, where available. If quoted market prices are not available, fair value has been estimated based upon quoted price of similar instruments, or where these are not available, on discounted expected cash flows using market rates commensurate with the credit quality and maturity of the security. Loans The fair value of the loan portfolio, including impaired loans, is estimated by discounting future cash flows using the current rates at which loans would be made to borrowers with similar credit ratings and for the same remaining maturities, considering the contractual terms in effect as of December 31 of the relevant period. Borrowings and short and long-term debt The fair value of short-term and long-term debt and borrowings is estimated using discounted cash flow analysis based on the current incremental borrowing rates for similar types of borrowing arrangements, taking into account the changes in the Bank’s credit margin. Commitments to extend credit, stand-by letters of credit, and financial guarantees written The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements which consider the counterparty risks. The following table provides information on the carrying value and estimated fair value of the Bank’s financial instruments that are not measured on a recurring basis:
|  | December 31, |
(In thousands of US$) |  | 2011 |  |  | 2010 |
|  | Carrying |  |  | Fair |  |  | Carrying |  |  | Fair |
|  | Value |  |  | Value |  |  | Value |  |  | Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Instruments with carrying value that approximates fair value |  |  | 882,762 |  |  |  | 882,762 |  |  |  | 495,037 |  |  |  | 495,037 |
Securities held-to-maturity |  |  | 26,536 |  |  |  | 26,637 |  |  |  | 33,181 |  |  |  | 33,206 |
Loans, net of allowance |  |  | 4,864,329 |  |  |  | 4,913,473 |  |  |  | 3,981,328 |  |  |  | 4,010,363 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Instruments with carrying value that approximates fair value |  |  | 2,693,408 |  |  |  | 2,692,832 |  |  |  | 2,123,149 |  |  |  | 2,123,149 |
Short-term borrowings |  |  | 1,323,466 |  |  |  | 1,319,350 |  |  |  | 1,095,400 |  |  |  | 1,092,265 |
Borrowings and long-term debt |  |  | 1,487,548 |  |  |  | 1,441,919 |  |  |  | 1,075,140 |  |  |  | 1,047,031 |
Commitments to extend credit, standby letters of credit, and financial guarantees written |  |  | 10,497 |  |  |  | 9,807 |  |  |  | 12,162 |  |  |  | 11,761 |

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- Definition Description of the fair value measurement of assets and liabilities as required under fair value measurement guidelines. This element also includes the description of risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising there from, and the amounts of, methodologies and assumptions used in determining the amounts of such items; as well as the disclosure of all significant concentrations of risk, including credit risk and market risk, arising from all financial instruments, whether from an individual counterparty or groups of counterparties. + References No definition available. + Details
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