US Bank 2007 Annual Report Download - page 52

in the cumulative translation adjustment for 2007 was not
material.
Table 18 summarizes information on the Company’s
derivative positions at December 31, 2007. Refer to Notes 1
and 19 of the Notes to Consolidated Financial Statements
for significant accounting policies and additional
information regarding the Company’s use of derivatives.
Market Risk Management In addition to interest rate risk,
the Company is exposed to other forms of market risk as a
consequence of conducting normal trading activities. These
trading activities principally support the risk management
processes of the Company’s customers including their
management of foreign currency and interest rate risks. The
Company also manages market risk of non-trading business
activities, including its MSRs and loans held-for-sale. Value
at Risk (“VaR”) is a key measure of market risk for the
Company. Theoretically, VaR represents the maximum
amount that the Company has placed at risk of loss, with a
ninety-ninth percentile degree of confidence, to adverse
market movements in the course of its risk taking activities.
VaR modeling of trading activities is subject to certain
limitations. Additionally, it should be recognized that there
are assumptions and estimates associated with VaR modeling,
and actual results could differ from those assumptions and
estimates. The Company mitigates these uncertainties through
regular monitoring of trading activities by management and
other risk management practices, including stop-loss and
position limits related to its trading activities. Stress-test
models are used to provide management with perspectives on
market events that VaR models do not capture.
The Company establishes market risk limits, subject to
approval by the Company’s Board of Directors. The
Company’s market valuation risk for trading and non-
trading positions, as estimated by the VaR analysis, was
$1 million and $15 million, respectively, at December 31,
2007, compared with $1 million and $30 million,
respectively, at December 31, 2006. The Company’s VaR
limit was $45 million at December 31, 2007.
During the second half of 2007, the financial markets
experienced significant turbulence as the impact of mortgage
delinquencies, defaults and foreclosures adversely affected
investor confidence in a broad range of investment sectors
and asset classes. Given that the Company’s owned
investments are principally U.S. Treasury securities, notes
issued by government-sponsored agencies or privately issued
securities with high investment grade credit ratings, the
Company believes these securities are not other-than-
temporarily impaired as of December 31, 2007, despite
being subject to changes in market valuations. As problems
in the sub-prime mortgage market emerged, certain securities
backed by mortgages experienced both credit and liquidity
issues, and investors became hesitant to purchase many types
of asset-backed securities, even those with little or no
exposure to sub-prime mortgages. The money market funds
managed by an affiliate of the Company, FAF Advisors, held
certain investments with exposure to the liquidity and credit
issues of the asset-backed securities markets. In the fourth
quarter of 2007, the Company purchased certain securities
at amortized cost from certain money market funds
managed by FAF Advisors to maintain investor confidence in
the funds. Given the nature and credit ratings of the
remaining holdings of these money market funds, the
Company does not intend to purchase additional
investments from the funds.
As a result of purchasing these structured investments,
the Company recognized valuation losses of $107 million in
its financial statements in the fourth quarter of 2007. The
Company continues to monitor changes in market
conditions, including the underlying credit quality and
performance of assets collateralizing these structured
investments. Given the nature of these securities and
widening credit spreads for similar assets, further
deterioration in value is likely to occur over the next few
quarters and may result in the recognition of further
impairment by the Company.
Liquidity Risk Management ALPC establishes policies, as well
as analyzes and manages liquidity, to ensure that adequate
funds are available to meet normal operating requirements in
addition to unexpected customer demands for funds, such as
high levels of deposit withdrawals or loan demand, in a
timely and cost-effective manner. The most important factor
in the preservation of liquidity is maintaining public
confidence that facilitates the retention and growth of a large,
stable supply of core deposits and wholesale funds.
Ultimately, public confidence is generated through profitable
operations, sound credit quality and a strong capital position.
The Company’s performance in these areas has enabled it to
develop a large and reliable base of core funding within its
market areas and in domestic and global capital markets.
Liquidity management is viewed from long-term and short-
term perspectives, as well as from an asset and liability
perspective. Management monitors liquidity through a regular
review of maturity profiles, funding sources, and loan and
deposit forecasts to minimize funding risk.
The Company maintains strategic liquidity and
contingency plans that are subject to the availability of asset
liquidity in the balance sheet. Monthly, ALPC reviews the
Company’s ability to meet funding requirements due to
adverse business events. These funding needs are then
matched with specific asset-based sources to ensure sufficient
funds are available. Also, strategic liquidity policies require
diversification of wholesale funding sources to avoid
concentrations in any one market source. Subsidiary
companies are members of various Federal Home Loan Banks
50 U.S. BANCORP