US Bank 2013 Annual Report Download - page 56

municipal securities business. On average, the Company
expects the one-day VaR to be exceeded by actual losses
two to three times per year for its trading businesses. The
Company monitors the effectiveness of its risk programs by
back-testing the performance of its VaR models, regularly
updating the historical data used by the VaR models and
stress testing. If the Company were to experience market
losses in excess of the estimated VaR more often than
expected, the VaR models and associated assumptions
would be analyzed and adjusted.
The average, high, low and period-end VaR amounts for the
Company’s trading positions were as follows:
Year Ended December 31
(Dollars in Millions) 2013 2012
Average .......................................... $1 $1
High .............................................. 33
Low .............................................. 11
Period-end ....................................... 11
The Company did not experience any actual trading
losses for its combined trading businesses that exceeded
VaR by more than a negligible amount during 2013. The
Company stress tests its market risk measurements to
provide management with perspectives on market events
that may not be captured by its VaR models, including worst
case historical market movement combinations that have not
necessarily occurred on the same date.
The Company calculates Stressed VaR using the same
underlying methodology and model as VaR, except that a
historical continuous one-year look-back period is utilized
that reflects a period of significant financial stress
appropriate to the Company’s trading portfolio. The period
selected by the Company includes the significant market
volatility of the last four months of 2008. The average, high,
low and period-end Stressed VaR amounts for the
Company’s trading positions for 2013 were $4 million,
$8 million, $2 million, and $3 million, respectively.
Valuations of positions in the client derivatives and
foreign currency transaction businesses are based on
quotes from third parties, which are generally compared with
an additional third party quote to determine if there are
material variances. Material variances are approved by the
Company’s market risk management department. Valuation
of positions in the corporate bond trading, loan trading and
municipal securities businesses are based on trader marks.
These trader marks are evaluated against third party prices,
with material variances approved by the Company’s market
risk management and credit administration departments.
The Company also measures the market risk of its
hedging activities related to residential mortgage loans held
for sale and MSRs using the Historical Simulation method.
The VaRs are measured at the ninety-ninth percentile and
employ factors pertinent to the market risks inherent in the
valuation of the assets and hedges. The Company monitors
the effectiveness of the models through back-testing,
updating the data and regular validations. A three-year look-
back period is used to obtain past market data for the
residential mortgage loans held for sale and related hedges.
Beginning in late 2013, the Company began to use a
seven-year look-back period to obtain past market data for
the MSRs and related hedges. Previously, a three-year look-
back period was used. The change in the look-back period
for the MSRs and related hedges allows the Company to
more appropriately capture the expected market volatility in
its VaR analysis.
The average, high and low VaR amounts for residential
mortgage loans held for sale and related hedges and the
MSRs and related hedges were as follows:
Year Ended December 31
(Dollars in Millions) 2013 2012
Residential Mortgage Loans Held For
Sale and Related Hedges
Average ....................................... $1 $2
High ........................................... 47
Low ............................................ –1
Mortgage Servicing Rights and
Related Hedges
Average ....................................... $3 $4
High ........................................... 78
Low ............................................ 12
Liquidity Risk Management The Company’s liquidity risk
management process is designed to identify, measure, and
manage the Company’s funding and liquidity risk to meet its
daily funding needs and to address expected and
unexpected changes in its funding requirements. The
Company engages in various activities to manage its liquidity
risk. These activities include diversifying its funding sources,
stress testing, and holding readily-marketable assets which
can be used as a source of liquidity if needed. In addition,
the Company’s profitable operations, sound credit quality
and strong capital position have enabled it to develop a
large and reliable base of core deposit funding within its
market areas and in domestic and global capital markets.
The Risk Management Committee of the Company’s
Board of Directors oversees the Company’s liquidity risk
management process, approves the Company’s liquidity
policy and reviews the contingency funding plan. The ALCO
reviews and approves the Company’s liquidity policy and
guidelines, and regularly assesses the Company’s ability to
meet funding requirements arising from adverse company-
specific or market events.
The Company’s liquidity policy requires it to maintain
diversified wholesale funding sources to avoid maturity, name
and market concentrations. The Company operates a Grand
Cayman branch for issuing Eurodollar time deposits. In
addition, the Company has relationships with dealers to issue
54 U.S. BANCORP