SunTrust 2014 Annual Report Download - page 86

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balance sheet structure, which may create mismatches in the
timing of cash inflows and outflows. Market liquidity risk, which
we also describe as refinancing or refunding risk, constitutes the
risk that we could lose access to the financial markets or the cost
of such access may rise to undesirable levels. Contingent
liquidity risk arises from rare and severely adverse liquidity
events; these events may be idiosyncratic or systemic.
We mitigate these risks utilizing a variety of tested liquidity
management techniques in keeping with regulatory guidance and
industry best practices. For example, we mitigate structural
liquidity risk by structuring our balance sheet prudently so that
we fund less liquid assets, such as loans, with stable funding
sources, such as retail and wholesale deposits, long-term debt,
and capital. We mitigate market liquidity risk by maintaining
diverse borrowing resources to fund projected cash needs and
structuring our liabilities to avoid maturity concentrations. We
model contingent liquidity risk from a range of potential adverse
circumstances in our contingency funding scenarios. These
scenarios inform the amount of contingency liquidity sources we
maintain as a buffer to ensure we can meet our obligations in a
timely manner under adverse events.
Governance. We maintain a comprehensive liquidity risk
governance structure in keeping with regulatory guidance and
industry best practices. Our Board, through the BRC, oversees
liquidity risk management and establishes our liquidity risk
appetite via a set of cascading risk limits. The BRC reviews and
approves risk policies to establish these limits and regularly
reviews reports prepared by senior management to monitor
compliance with these policies. The Board charges the CEO with
determining corporate strategies in accordance with its risk
appetite and the CEO is a member of our ALCO, which is the
executive level committee with oversight of liquidity risk
management. The ALCO regularly monitors our liquidity and
compliance with liquidity risk limits, and also reviews and
approves liquidity management strategies and tactics.
Management and Reporting Framework. We base our
governance structure on and mitigate liquidity risk using three
lines of defense. Our Corporate Treasury department constitutes
the first line of defense, managing consolidated liquidity risks
we incur in the course of our business. Under the oversight of
the ALCO, Corporate Treasury thereby assumes responsibility
for identifying, measuring, monitoring, reporting, and managing
our liquidity risks. In so doing, Corporate Treasury develops and
implements short- and long-term liquidity management
strategies, funding plans, and liquidity stress tests. Corporate
Treasury primarily monitors and manages liquidity risk at the
Parent Company and Bank levels as the non-bank subsidiaries
are relatively small and these subsidiaries ultimately rely upon
the Parent Company as a source of liquidity in adverse
environments. However, Corporate Treasury also monitors
liquidity developments in and maintains a regular dialogue with
other legal entities within SunTrust.
Our MRM group constitutes our second line of defense in
liquidity risk management. MRM conducts independent
oversight and governance of liquidity risk management
activities. For example, MRM works with Corporate Treasury
to ensure our liquidity risk management practices conform to
applicable laws and regulations and evaluates key assumptions
incorporated in our contingency funding scenarios.
Our internal audit function provides a third line of defense
in liquidity risk management. The role of internal audit is to
provide assurance through an independent assessment of the
adequacy of internal controls in the first two lines of defense.
These controls consist of procedural documentation, approval
processes, reconciliations, and other mechanisms employed by
the first two lines of defense in ensuring that liquidity risk is
consistent with applicable policies, procedures, laws, and
regulations.
In September 2014, the Federal Reserve published final
rules with respect to LCR requirements. The LCR will require
banking organizations to hold unencumbered high quality, liquid
assets sufficient to withstand projected cash outflows under a
prescribed liquidity stress scenario. These new liquidity rules
will be phased in as regulatory requirements and will require that
we maintain an LCR above 90% beginning January 1, 2016 and
100% beginning January 1, 2017. We expect to meet or exceed
LCR requirements within the regulatory timelines. At
December 31, 2014, our LCR was already above the January 1,
2016 requirement of 90%.
In 2011, the Federal Reserve published proposed measures
to strengthen regulation and supervision of large bank holding
companies and systemically important nonbank financial firms,
pursuant to Sections 165 and 166 of the Dodd-Frank Act. In
February 2014, the Federal Reserve approved final rules to
implement these “enhanced prudential standards” under
Regulation YY, which has an effective date of January 1, 2015.
These regulations include largely qualitative liquidity risk
management practices, including internal liquidity stress testing.
We believe that our liquidity risk management and stress testing
practices meet or exceed these new standards.
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. The Bank and the
Parent Company borrow in the money markets using instruments
such as Fed funds, Eurodollars, and CP. At December 31, 2014,
the Parent Company had no CP outstanding and the Bank
retained a material cash position in its Federal Reserve account.
The Parent Company also retains a material cash position, in
accordance with our policies and risk limits, discussed in greater
detail below.
Sources of Funds. Our primary source of funds is a large, stable
retail deposit base. Core deposits, predominantly made up of
consumer and commercial deposits originated primarily from
our retail branch network, are our largest and most cost-effective
source of funding. Core deposits increased to $139.2 billion at
December 31, 2014, from $127.7 billion at December 31, 2013.
We also maintain access to diversified sources for both
secured and unsecured wholesale funding. These uncommitted
sources include Fed funds purchased from other banks, securities
sold under agreements to repurchase, negotiable CDs, offshore
deposits, FHLB advances, Global Bank Notes, and CP.
Aggregate wholesale funding increased to $19.4 billion at
December 31, 2014 from $17.3 billion at December 31, 2013.
Net short-term unsecured borrowings, which includes wholesale
domestic and foreign deposits as well as Fed funds purchased,