KeyBank 2014 Annual Report Download - page 94

Figure 33. Simulated Change in Net Interest Income
December 31, 2014
Basis point change assumption (short-term rates) -25 +200
Tolerance level -4.00 % -4.00 %
Interest rate risk assessment -.96 % 3.20 %
December 31, 2013
Basis point change assumption (short-term rates) -25 +200
Tolerance level -4.00 % -4.00 %
Interest rate risk assessment -1.33 % 3.00 %
The results of additional sensitivity analysis of alternate interest rate paths and loan and deposit behavior
assumptions indicates that net interest income could increase or decrease from the base simulation results
presented in Figure 33. Net interest income is highly dependent on the timing, magnitude, frequency, and path of
interest rate increases and the associated assumptions for deposit repricing relationships, lending spreads, and the
balance behavior of transaction accounts. The unprecedented low level of interest rates increases the uncertainty
of assumptions for deposit balance behavior and deposit repricing relationships to market interest rates. Our
historical deposit repricing betas in the last rising rate cycle ranged between 50% and 60% for interest-bearing
deposits, and we continue to make similar assumptions in our modeling. The sensitivity testing of these
assumptions supports our confidence that actual results are likely to be within a 75 basis point range of modeled
results.
Key will continue to monitor balance sheet flows and expects the benefit from rising rates to increase modestly
prior to any increase in the federal funds rate. Our current interest rate risk position could fluctuate to higher or
lower levels of risk depending on the competitive environment and client behavior that may affect the actual
volume, mix, maturity, and repricing characteristics of loan and deposit flows. As changes occur to both the
configuration of the balance sheet and the outlook for the economy, management proactively evaluates hedging
opportunities that may change our interest rate risk profile.
We also conduct simulations that measure the effect of changes in market interest rates in the second and third
years of a three-year horizon. These simulations are conducted in a manner similar to those based on a 12-month
horizon. To capture longer-term exposures, we calculate exposures to changes to the EVE as discussed in the
following section.
Economic value of equity modeling. EVE complements net interest income simulation analysis as it estimates
risk exposure beyond 12-, 24-, and 36-month horizons. EVE modeling measures the extent to which the
economic values of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in
interest rates. EVE is calculated by subjecting the balance sheet to an immediate 200 basis point increase or
decrease in interest rates, measuring the resulting change in the values of assets, liabilities and off-balance sheet
instruments, and comparing those amounts with the base case of an unchanged interest rate environment.
Because the calculation of EVE under an immediate 200 basis point decrease in interest rates in the current low
rate environment results in certain interest rates declining to zero and a less than 200 basis point decrease in
certain yield curve term points, we have modified the standard declining rate scenario to an immediate 100 basis
point decrease. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-
contractual maturities. Those assumptions are based on historical behaviors, as well as our expectations. We
develop remediation plans that would maintain residual risk within tolerance if this analysis indicates that our
EVE will decrease by more than 15% in response to an immediate increase or decrease in interest rates. We are
operating within these guidelines as of December 31, 2014.
Management of interest rate exposure. We use the results of our various interest rate risk analyses to formulate
A/LM strategies to achieve the desired risk profile while managing to our objectives for capital adequacy and
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