US Bank 2015 Annual Report Download - page 63

the statistical risk of loss the Company has to adverse market
movements over a one-day time horizon. The Company uses
the Historical Simulation method to calculate VaR for its
trading businesses measured at the ninety-ninth percentile
using a one-year look-back period for distributions derived
from past market data. The market factors used in the
calculations include those pertinent to market risks inherent in
the underlying trading portfolios, principally those that affect its
corporate bond trading business, foreign currency transaction
business, client derivatives business, loan trading business
and 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) 2015 2014
Average ................................... $1 $1
High ...................................... 2 2
Low ...................................... 1 1
Period-end ................................. 1 1
The Company did not experience any actual trading losses
for its combined trading businesses that exceeded VaR
during 2015 and 2014. 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 were as follows:
Year Ended December 31
(Dollars in Millions) 2015 2014
Average ................................... $4 $4
High ...................................... 8 8
Low ...................................... 2 2
Period-end ................................. 3 5
Valuations of positions in the client derivatives and foreign
currency transaction businesses are based on standard cash
flow or other valuation techniques using market-based
assumptions. These valuations are compared to third party
quotes or other market prices to determine if there are
significant variances. Significant 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 significant variances approved by the
Company’s risk management department.
The Company also measures the market risk of its hedging
activities related to residential MLHFS 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 models.
The average, high and low VaR amounts for the residential
MLHFS and related hedges and the MSRs and related
hedges were as follows:
Year Ended December 31
(Dollars in Millions) 2015 2014
Residential Mortgage Loans Held For Sale
and Related Hedges
Average ................................. $1 $1
High .................................... 2 2
Low .................................... – –
Mortgage Servicing Rights and Related
Hedges
Average ................................. $6 $4
High .................................... 8 8
Low .................................... 4 2
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 Company’s Board of Directors approves the
Company’s liquidity policy. The Risk Management Committee
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