KeyBank 2015 Annual Report Download - page 169

valuation models or third-party pricing services. Both of these approaches rely on market-based parameters,
when available, such as interest rate yield curves, option volatilities, and credit spreads, or unobservable inputs.
Unobservable inputs may be based on our judgment, assumptions, and estimates related to credit quality,
liquidity, interest rates, and other relevant inputs.
Valuation adjustments, such as those pertaining to counterparty and our own credit quality and liquidity, may be
necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made
when market pricing does not accurately reflect the counterparty’s or our own credit quality. We make liquidity
valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the
instruments when we are unable to observe recent market transactions for identical or similar instruments.
Liquidity valuation adjustments are based on the following factors:
/the amount of time since the last relevant valuation;
/whether there is an actual trade or relevant external quote available at the measurement date; and
/volatility associated with the primary pricing components.
We ensure that our fair value measurements are accurate and appropriate by relying upon various controls,
including:
/an independent review and approval of valuation models and assumptions;
/recurring detailed reviews of profit and loss; and
/a validation of valuation model components against benchmark data and similar products, where possible.
We recognize transfers between levels of the fair value hierarchy at the end of the reporting period. Quarterly, we
review any changes to our valuation methodologies to ensure they are appropriate and justified, and refine our
valuation methodologies if more market-based data becomes available. The Fair Value Committee, which is
governed by ALCO, oversees the valuation process. Various Working Groups that report to the Fair Value
Committee analyze and approve the underlying assumptions and valuation adjustments. Changes in valuation
methodologies for Level 1 and Level 2 instruments are presented to the Accounting Policy group for approval.
Changes in valuation methodologies for Level 3 instruments are presented to the Fair Value Committee for
approval. The Working Groups are discussed in more detail in the qualitative disclosures within this note and in
Note 13 (“Acquisitions and Discontinued Operations”). Formal documentation of the fair valuation
methodologies is prepared by the lines of business and support areas as appropriate. The documentation details
the asset or liability class and related general ledger accounts, valuation techniques, fair value hierarchy level,
market participants, accounting methods, valuation methodology, group responsible for valuations, and valuation
inputs.
Additional information regarding our accounting policies for determining fair value is provided in Note 1
(“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements.”
Qualitative Disclosures of Valuation Techniques
Loans. Most loans recorded as trading account assets are valued based on market spreads for similar assets
since they are actively traded. Therefore, these loans are classified as Level 2 because the fair value recorded is
based on observable market data for similar assets.
Securities (trading and available for sale).We own several types of securities, requiring a range of valuation
methods:
/Securities are classified as Level 1 when quoted market prices are available in an active market for the
identical securities. Level 1 instruments include exchange-traded equity securities.
/Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is
determined using pricing models (either by a third-party pricing service or internally) or quoted prices of
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