KeyBank 2014 Annual Report Download - page 99

Credit risk management
Credit risk is the risk of loss to us arising from an obligor’s inability or failure to meet contractual payment or
performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities,
and enter into financial derivative contracts, all of which have related credit risk.
Credit policy, approval, and evaluation
We manage credit risk exposure through a multifaceted program. The Credit Risk Committee approves both
retail and commercial credit policies. These policies are communicated throughout the organization to foster a
consistent approach to granting credit.
Our credit risk management team is responsible for credit approval, is independent of our lines of business, and
consists of senior officers who have extensive experience in structuring and approving loans. Only credit risk
management members are authorized to grant significant exceptions to credit policies. It is not unusual to make
exceptions to established policies when mitigating circumstances dictate, but most major lending units have been
assigned specific thresholds to keep exceptions at an acceptable level based upon portfolio and economic
considerations.
Loan grades are assigned at the time of origination, verified by the credit risk management team and periodically
reevaluated thereafter. Most extensions of credit are subject to loan grading or scoring. This risk rating
methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two
internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the
second rating reflects expected recovery rates on the credit facility. Default probability is determined based on,
among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the
borrower’s competitive position within its industry sector, and our view of industry risk within the context of the
general economic outlook. Types of exposure, transaction structure and collateral, including credit risk mitigants,
affect the expected recovery assessment.
Our credit risk management team uses risk models to evaluate consumer loans. These models, known as
scorecards, forecast the probability of serious delinquency and default for an applicant. The scorecards are
embedded in the application processing system, which allows for real-time scoring and automated decisions for
many of our products. We periodically validate the loan grading and scoring processes.
We maintain an active concentration management program to encourage diversification in our credit portfolios.
For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the
strength of the borrower. Our legal lending limit is approximately $1.6 billion for any individual borrower.
However, internal hold limits generally restrict the largest exposures to less than 20% of that amount. As of
December 31, 2014, we had five client relationships with loan commitments net of credit default swaps of more
than $200 million. The average amount outstanding on these five individual net obligor commitments was $43
million at December 31, 2014. In general, our philosophy is to maintain a diverse portfolio with regard to credit
exposures.
We actively manage the overall loan portfolio in a manner consistent with asset quality objectives and
concentration risk tolerances to mitigate credit risk. We utilize credit default swaps on a limited basis to transfer
a portion of the credit risk associated with a particular extension of credit to a third party. At December 31, 2014,
we used credit default swaps with a notional amount of $309 million to manage the credit risk associated with
specific commercial lending obligations. We may also sell credit derivatives — primarily single name credit
default swaps — to offset our purchased credit default swap position prior to maturity. At December 31, 2014,
we had sold credit default swaps outstanding with a total notional amount of $5 million.
Credit default swaps are recorded on the balance sheet at fair value. Related gains or losses, as well as the
premium paid or received for credit protection, are included in the “corporate services income” and “other
income” components of noninterest income.
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