SunTrust 2014 Annual Report Download - page 85

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We have valuation policies, procedures, and methodologies for
all covered positions. Additionally, reporting of trading positions
is in accordance with U.S. GAAP and is subject to independent
price verification. See Note 17, "Derivative Financial
Instruments" and Note 18, "Fair Value Election and
Measurement" to the Consolidated Financial Statements in this
Form 10-K, and the "Critical Accounting Policies" section of this
MD&A.
Model risk management: Our model risk management approach
for validating and evaluating the accuracy of internal and vended
models and associated processes includes developmental and
implementation testing and ongoing monitoring and
maintenance performed by the various model developers in
conjunction with model owners. Our MRMG is responsible for
the independent model validation for the VAR and stressed VAR
models. The validation typically includes evaluation of all model
documentation, as well as model monitoring and maintenance
plans. In addition, the MRMG performs its own testing. Due to
ongoing developments in financial markets, evolution in
modeling approaches, and for purposes of model enhancement,
we assess the performance of all VAR models regularly through
the model monitoring and maintenance process. During 2014,
as part of our ongoing model monitoring and maintenance, we
enhanced the granularity of the credit curves used in our VAR
and Stressed VAR models by adding more tenors and industry
sectors.
Stress testing: We use a comprehensive range of stress testing
techniques to help monitor risks across trading desks and to
augment standard daily VAR reporting. The stress testing
framework is designed to quantify the impact of rare and extreme
historical but plausible stress scenarios that could lead to large
unexpected losses. In addition to performing firmwide stress
testing of our aggregate trading portfolio, additional types of
secondary stress tests including historical repeats and
simulations using hypothetical risk factor shocks are also
performed. Across our comprehensive stress testing framework,
all trading positions across each applicable market risk category
(interest rate risk, equity risk, foreign exchange rate risk, credit
spread risk, and commodity price risk) are included. We review
stress testing scenarios on an ongoing basis and make updates
as necessary to ensure that both current and potential emerging
risks are appropriately captured.
Trading portfolio capital adequacy: We assess capital adequacy
on a regular basis, based on estimates of our risk profile and
capital positions under baseline and stressed scenarios. Scenarios
consider material risks, including credit risk, market risk, and
operational risk. Our assessment of capital adequacy arising from
market risk also includes a review of risk arising from material
portfolios of covered positions. See “Capital Resources” in this
MD&A for additional discussion of capital adequacy.
Liquidity Risk Management
Liquidity risk is the risk of being unable, at a reasonable cost, to
meet financial obligations as they come due. We manage
liquidity risk utilizing three lines of defense as described below.
These lines of defense are designed to mitigate our three primary
liquidity risks: structural (“mismatch”) liquidity risk, market
liquidity risk, and contingent liquidity risk. Structural liquidity
risk arises from our maturity transformation activities and