SunTrust 2006 Annual Report Download - page 51

Credit Risk Management
Credit risk refers to the potential for economic loss arising from the failure of SunTrust clients to meet
their contractual agreements on all credit instruments, including on-balance sheet exposures from loans
and leases, contingent exposures from unfunded commitments, letters of credit, credit derivatives, and
counterparty risk under interest rate and foreign exchange derivative products. As credit risk is an
essential component of many of the products and services provided by the Company to its clients, the
ability to accurately measure and manage credit risk is integral to maintain both the long-run
profitability of its lines of business and capital adequacy of the enterprise.
SunTrust manages and monitors extensions of credit risk through initial underwriting processes and
periodic reviews. SunTrust maintains underwriting standards in accordance with credit policies and
procedures, and Credit Risk Management conducts independent risk reviews to ensure active
compliance with all policies and procedures. Credit Risk Management periodically reviews its lines of
business to monitor asset quality trends and the appropriateness of credit policies. In particular, total
borrower exposure limits are established and concentration risk is monitored. SunTrust has made a
major commitment to maintain and enhance comprehensive credit systems in order to be compliant with
business requirements and evolving regulatory standards. As part of a continuous improvement process,
SunTrust Credit Risk Management evaluates potential enhancements to its risk measurement and
management tools, implementing them as appropriate along with amended credit policies and
procedures.
Borrower/counterparty (obligor) risk and facility risk are evaluated using the Company’s risk rating
methodology, which has been implemented in the lines of business representing the largest total credit
exposures. SunTrust uses various risk models in the estimation of expected and unexpected losses.
These models incorporate both internal and external default and loss experience. To the extent possible,
the Company collects internal data to ensure the validity, reliability, and accuracy of its risk models
used in default and loss estimation.
Operational Risk Management
SunTrust faces ongoing and emerging risk and regulatory pressure related to the activities that surround
the delivery of banking and financial products. Coupled with external influences such as market
conditions, fraudulent activities, disasters, security risks, country exposure, and legal risk, the potential
for operational and reputational loss has increased significantly.
SunTrust believes that effective management of operational risk – defined as the risk of loss resulting
from inadequate or failed internal processes, people and systems, or from external events – plays a
major role in both the level and the stability of the profitability of the institution. SunTrust established
an Operational Risk Management function in 2005 to provide leadership, expertise, and direction to
each line of business and functional area in the development and maintenance of an effective,
comprehensive program for the management of operational risk. These efforts support SunTrust’s goals
to achieve performance targets, prevent loss of resources, and meet regulatory requirements for
operational risk management.
Operational Risk Management implements and monitors a framework to organizationally identify,
assess, control, quantify, monitor, and report on operational risks companywide. The goals of this
framework are to conduct effective operational risk techniques and strategies, minimize operational
losses through enhanced collection and reporting of loss event data, and strengthen SunTrust’s
performance by optimizing operational capital allocation.
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