SunTrust 2012 Annual Report Download - page 95

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profitability. Our Operational Risk Management function oversees an enterprise-wide framework intended to identify, assess,
control, monitor, and report on operational risks Company-wide. These processes support our goals in seeking to minimize
future operational losses and strengthen our performance by optimizing operational capital allocation.
Operational Risk Management is overseen by our CORO, who reports directly to the CRO. The operational risk governance
structure includes an operational risk manager and support staff within each line of business and corporate function. These
risk managers are responsible for execution of risk management within their areas in compliance with CRM's policies and
procedures.
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 NII and MVE to adverse
movements in interest rates, is our primary market risk and mainly arises from the structure of our balance sheet, which
includes all loans. Variable rate loans, prior to any hedging related actions, are approximately 57% of total loans and after
giving consideration to hedging related actions, are approximately 43% of total loans.
We are also exposed to market risk in our trading instruments carried at fair value. ALCO meets regularly and is responsible
for reviewing our open positions and establishing policies to monitor and limit exposure to market risk.
Market Risk from Non-Trading Activities
The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved
by the Board. These limits and guidelines reflect our tolerance for interest rate risk over both short-term and long-term horizons.
No limit breaches occurred during 2012.
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, which, as described in additional detail below, are employed by management to understand NII at risk
and MVE at risk. These measures show that our interest rate risk profile is slightly asset sensitive.
MVE and NII sensitivity are complementary interest rate risk metrics and should be viewed together. NII sensitivity captures
asset and liability repricing mismatches for the first year inclusive of forecast balance sheet changes and is considered a shorter
term measure, while MVE sensitivity captures mismatches within the period end balance sheets through the financial
instruments' respective maturities and is considered a longer term measure.
A positive NII sensitivity in a rising rate environment indicates that over the forecast horizon of one-year, asset based income
will increase more quickly than liability based expense due to balance sheet composition. A negative MVE sensitivity in a
rising rate environment indicates that value of the financial assets will decrease more than the value of financial liabilities.
One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to
model NII from assets, liabilities, and derivative positions under various interest rate scenarios and balance sheet structures.
This analysis measures the sensitivity of NII over a two year time horizon, which differs from the interest rate sensitivities
in Table 29 which is prescribed to be over a one 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 clients 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 NII 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, basis risk analysis, and yield curve twists. Each analysis
incorporates what management believes to be the most appropriate assumptions about client behavior in an interest rate
scenario. Specific strategies are also analyzed to determine their impact on NII levels and sensitivities.
In 2007, we elected to carry $6.8 billion of fixed rate debt and receive fixed/pay floating interest rate swaps at fair value in
accordance with applicable accounting standards. This change resulted in a material impact to our NII sensitivity profiles as
the income on the fair value swaps was no longer being reflected in net interest margin, but in trading income. As a result, to
better illustrate our interest rate sensitivity from an economic perspective we previously disclosed the impact of including the
fair value swaps in our NII sensitivity profiles separately. These fair value debt and swap balances have declined to $1.2