SunTrust 2007 Annual Report Download - page 58

to identify, assess, control, quantify, monitor, and report on operational risks company wide. These efforts support our goals
in seeking to minimize operational losses and strengthen our performance by optimizing operational capital allocation.
Operational Risk Management is overseen by our Chief Operational Risk Officer, who reports directly to the Chief Risk
Officer. The corporate governance structure also includes a risk manager and support staff embedded within each line of
business and corporate function. These risk managers, while reporting directly to their respective line or function, also report
indirectly to the Chief Risk Officer and are responsible for execution of the Operational Risk Management program within
their areas.
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 interest rates, is our primary market risk, and mainly arises
from the structure of the balance sheet. We are also exposed to market risk in our trading activities, MSRs, loan warehouse
and pipeline, debt carried at fair value and equity holdings of The Coca-Cola Company common stock. The ALCO meets
regularly and is responsible for reviewing our open positions and establishing policies to monitor and limit exposure to
market risk. The policies established by ALCO are reviewed and approved by our 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 the Board and within narrower guidelines established by ALCO. These limits and guidelines reflect our
tolerance for interest rate risk over both short-term and long-term horizons.
The major sources of our non-trading interest rate risk are timing differences in the maturity and repricing characteristics of
assets and liabilities, changes in the shape of the yield curve, and the potential exercise of explicit or embedded options. We
measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation
and valuation models, as well as repricing gap analysis.
One of the primary methods that we use 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 two year time
horizon. 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 different rate
environments. This analysis incorporates several assumptions, the most material of which relate to the repricing
characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities.
As the future path of interest rates cannot be known in advance, we use simulation analysis to project net interest income
under various interest rate scenarios including implied forward and deliberately extreme and perhaps unlikely scenarios. The
analyses may include rapid and gradual ramping of interest rates, rate shocks, spread narrowing and widening, and yield
curve twists. Each analysis incorporates what management believes to be the most appropriate assumptions about customer
behavior in an interest rate scenario. Specific strategies are also analyzed to determine their impact on net interest income
levels and sensitivities.
In 2007, we updated our deposit repricing assumptions and the base case yield curve from which sensitivity analysis is
derived (now the implied forward curve). Further, the sensitivity is now measured as a percentage change in net interest
income due to an instantaneous 100 basis point move instead of a gradual 100 basis point move. We believe instantaneous
shifts are more robust and better illustrate sensitivities. Estimated changes set forth below are dependent upon material
assumptions such as those previously discussed. The net interest income profile is relatively flat with respect to instantaneous
100 bp changes in rates.
Economic Perspective
Rate Change
(Basis Points)
Estimated % Change in
Net Interest Income Over 12 Months
December 31, 2007 December 31, 2006
+100 (1.0%) (0.9%)
-100 0.3% 1.0%
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