KeyBank 2013 Annual Report Download - page 92

The Chief Risk Officer ensures that relevant risk information is properly integrated into strategic and business
decisions, ensures appropriate ownership of risks, provides input into performance and compensation decisions,
assesses aggregate enterprise risk, monitors capabilities to manage critical risks, and executes appropriate Board
and stakeholder reporting.
Federal banking regulators continue to emphasize with financial institutions the importance of relating capital
management strategy to the level of risk at each institution. We believe our internal risk management processes
help us achieve and maintain capital levels that are commensurate with our business activities and risks, and
conform to regulatory expectations.
Market risk management
Market risk is the risk that movements in market risk factors, including interest rates, foreign exchange rates,
equity prices, commodity prices, credit spreads and volatilities will reduce Key’s income and the value of its
portfolios. These factors influence prospective yields, values, or prices associated with the instrument. For
example, the value of a fixed-rate bond will decline when market interest rates increase, while the cash flows
associated with a variable rate loan will increase when interest rates increase. The holder of a financial
instrument is exposed to market risk when either the cash flows or the value of the instrument is tied to such
external factors.
We are exposed to market risk both in our trading and nontrading activities, which includes asset and liability
management activities. Our trading positions are carried at fair value with changes recorded in the income
statement. These positions are subject to various market-based risk factors that impact the fair value of the
financial instruments in the trading category. Our traditional banking loan and deposit products as well as long-
term debt and certain short-term borrowings are nontrading positions. These positions are generally carried at the
principal amount outstanding for assets and the amount owed for liabilities. The nontrading positions are subject
to changes in economic value due to varying market conditions, primarily changes in interest rates.
Trading market risk
Key incurs market risk as a result of trading, investing, and client facilitation activities, principally within our
investment banking and capital markets business. Key has exposures to a wide range of interest rates, equity
prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities
and spreads. Our primary market risk exposures are a result of trading activities in the derivative and fixed
income markets and maintaining positions in these instruments. We maintain modest trading inventories to
facilitate customer flow, make markets in securities, and hedge certain risks. The majority of our positions are
traded in active markets.
Management of trading market risks. Market risk management is an integral part of Key’s risk culture.
Oversight of trading market risks is governed by the Risk Committee of our Board, the ERM Committee, and the
Market Risk Committee (collectively, the “Committees”). Market risk policies and procedures have been defined
and approved by the Market Risk Committee, a Tier 2 Risk Governance Committee, and take into account our
tolerance for risk and consideration for the business environment. The Committees regularly review and discuss
market risk reports prepared by our Market Risk Management group (“MRM”) that contain our market risk
exposures and results of monitoring activities.
MRM is an independent risk management function that partners with the lines of business to identify, measure,
and monitor market risks throughout our company. MRM is responsible for ensuring transparency of significant
market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior
management. The various business units and trading desks are responsible for ensuring that market risk
exposures are well-managed and prudent. Market risk is monitored through various measures, such as VaR, and
through routine stress testing, sensitivity, and scenario analyses. MRM conducts stress tests for each covered
position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are
prepared daily and distributed to appropriate management.
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