SunTrust 2003 Annual Report Download - page 43

Annual Report 2003 SunTrust Banks, Inc. 41
MARKET RISK MANAGEMENT
Market risk refers to potential losses arising from changes in
interest rates, foreign exchange rates, equity prices, commodity
prices and other relevant market rates or prices. Interest rate
risk, defined as the exposure of net interest income and
Economic Value of Equity (EVE) to adverse movements in inter-
est rates, is SunTrust’s primary market risk, and mainly arises
from the structure of the balance sheet (non-trading activities).
SunTrust is also exposed to market risk in its trading activities,
mortgage servicing rights, mortgage lending activities, and
equity holdings of The Coca-Cola Company common stock.
ALCO meets regularly and is responsible for reviewing the inter-
est-rate sensitivity position of the Company and establishing
policies to monitor and limit exposure to interest rate risk. The
policies established by ALCO are reviewed and approved by the
Company’s Board of Directors.
MARKET RISK FROM NON-TRADING ACTIVITIES
The primary goal of interest rate risk management is to control
exposure to interest rate risk, both within policy limits approved by
ALCO and the Board and within narrower guidelines established
by ALCO. These limits and guidelines reflect SunTrust’s tolerance
for interest rate risk over both short-term and long-term horizons.
The major sources of the Company’s non-trading interest rate
risk are timing differences in the maturity and repricing characteris-
tics of assets and liabilities, changes in relationships between rate
indices (basis risk), changes in the shape of the yield curve, and the
potential exercise of explicit or embedded options. SunTrust meas-
ures these risks and their impact by identifying and quantifying
exposures through use of sophisticated simulation and valuation
models, as well as duration gap analysis.
The primary method that SunTrust uses to quantify and
manage interest rate risk is simulation analysis, which is used to
model net interest income from assets, liabilities, and derivative
positions over a specified time period under various interest rate
scenarios and balance sheet structures. This analysis measures
the sensitivity of net interest income over a relatively short time
horizon (two years). Key assumptions in the simulation analysis
(and in the valuation analysis discussed below) relate to the
behavior of interest rates and spreads, the changes in product
balances and the behavior of loan and deposit customers in dif-
ferent rate environments. Material assumptions include the
The following table presents the expected maturities of risk management derivative financial instruments:
As of December 31, 2002
1 Year 1–2 2–5 5–10 After 10
(Dollars in millions) or Less Years Years Years Years Total
Cash Flow Asset Hedges
Notional amount – swaps $ — $ — $ — $ — $ — $ —
Notional amount – other 56 — — — — 56
Weighted-average receive rate — — — — — —
Weighted-average pay rate — — — — — —
Unrealized gain — — — — — —
Fair Value Asset Hedges
Notional amount – swaps — 25 — — — 25
Notional amount – forwards 6,286 — — — — 6,286
Weighted-average receive rate — 2.58% — — — 2.58%
Weighted-average pay rate — 4.97% — — — 4.97%
Unrealized loss (79) (1) — — — (80)
Cash Flow Liability Hedges
Notional amount – swaps 1,250 1,095 — — — 2,345
Notional amount – other — — — — — —
Weighted-average receive rate 1.42% 1.60% — — — 1.51%
Weighted-average pay rate 4.79% 4.91% — — — 4.85%
Unrealized loss (22) (50) — — — (72)
Fair Value Liability Hedges
Notional amount – swaps 825 — 750 — 950 2,525
Notional amount – other — — — — — —
Weighted-average receive rate 1.23% — 6.33% — 6.23% 4.63%
Weighted-average pay rate 1.25% — 1.73% — 1.66% 1.55%
Unrealized gain — — 94 — 64 158