SunTrust 2009 Annual Report Download - page 72

yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.
The net interest income simulation and valuation analyses do not include actions that management may undertake to manage
this risk in response to anticipated changes in interest rates.
Trading Activities
Trading instruments are used as part of our overall balance sheet management strategies and to support client requirements
through our broker/dealer subsidiary. Product offerings to clients include debt securities, loans traded in the secondary
market, equity securities, derivatives and foreign exchange contracts, and similar financial instruments. Other trading
activities include acting as a market maker in certain debt and equity securities and related derivatives. Typically, we
maintain a securities inventory to facilitate client transactions. Also in the normal course of business, we assume a limited
degree of market risk in hedging strategies.
We have developed policies and procedures to manage market risk associated with trading, capital markets and foreign
exchange activities using a VAR approach that determines total exposure arising from interest rate risk, equity risk, foreign
exchange risk, spread risk, and volatility risk. For trading portfolios, VAR measures the estimated maximum loss from a
trading position, given a specified confidence level and time horizon. VAR exposures and actual results are monitored daily
for each trading portfolio. Our VAR calculation measures the potential losses using a 99% confidence level with a one day
holding period. This means that, on average, losses are expected to exceed VAR two or three times per year. We had zero
backtest exceptions to our overall VAR during the last twelve months. The following table displays high, low, and average
VAR for the years ended December 31, 2009 and 2008.
(Dollars in millions) 2009 2008
Average VAR $20.7 $28.5
High VAR $27.6 $42.3
Low VAR $14.8 $16.5
The lower average VAR during the year ended December 31, 2009 compared to the year ended December 31, 2008 is
primarily due to sales, paydowns and maturities of acquired illiquid assets. Trading assets net of trading liabilities averaged
$4.7 billion and $7.7 billion for the years ended December 31, 2009 and 2008, respectively. Trading assets net of trading
liabilities were $2.8 billion and $7.2 billion at December 31, 2009 and 2008, respectively. Declines in average and ending
trading assets net of trading liabilities is primarily due to balance sheet management activities and the reduction in acquired
illiquid assets.
Liquidity Risk
Liquidity risk is the risk of being unable to meet obligations as they come due at a reasonable funding cost. We mitigate this
risk by attempting to structure our balance sheet prudently and by maintaining diverse borrowing resources to fund potential
cash needs. For example, we structure our balance sheet so that we fund less liquid assets, such as loans, with stable funding
sources, such as retail deposits, long-term debt, wholesale deposits, and capital. We assess liquidity needs arising from asset
growth, maturing obligations, and deposit withdrawals, considering operations in both the normal course of business and
times of unusual events. In addition, we consider our off-balance sheet arrangements and commitments that may impact
liquidity in certain business environments.
Our ALCO measures liquidity risks, sets policies to manage these risks, and reviews adherence to those policies at its
monthly meetings. For example, we manage the use of short-term unsecured borrowings as well as total wholesale funding
through policies established and reviewed by ALCO. In addition, the Risk Committee of our Board sets liquidity limits and
reviews current and forecasted liquidity positions at each of its regularly scheduled meetings.
We have contingency funding plans that assess liquidity needs that may arise from certain stress events such as credit rating
downgrades, rapid asset growth, and financial market disruptions. Our contingency plans also provide for continuous
monitoring of net borrowed funds dependence and available sources of contingent liquidity. These sources of contingent
liquidity include capacity to borrow at the Federal Reserve discount window and from the FHLB system and the ability to
sell, pledge or borrow against unencumbered securities in the Bank’s investment portfolio. As of December 31, 2009, the
potential liquidity from these three sources totaled $31.6 billion—an amount we believe exceeds any contingent liquidity
needs.
Uses of Funds. Our primary uses of funds include the extension of loans and credit, the purchase of investment securities,
working capital, and debt and capital service. In addition, contingent uses of funds may arise from events such as financial
market disruptions or credit rating downgrades. Factors that affect our credit ratings include, but are not limited to, the credit
risk profile of our assets, the adequacy of our loan loss reserves, earnings, the liquidity profile of both the Bank and the
Parent Company, the economic environment, particularly related to our markets, and the adequacy of our capital base.
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