BB&T 2011 Annual Report Download - page 76

Risk Governance
The management of risk has always been an enterprise-wide initiative at BB&T. It is part of BB&T’s mission statement
that risk is managed to optimize the long-term return to shareholders, while providing a safe and sound investment.
The Chief Risk Officer leads the Risk Management Organization (“RMO”), which designs, organizes and manages the
risk framework. The management of risk begins at the business level through risk identification and management
programs. The RMO is responsible for ensuring effective risk management oversight, measurement, monitoring, reporting
and consistency of controls.
Market Risk Management
The effective management of market risk is essential to achieving BB&T’s strategic financial objectives. As a financial
institution, BB&T’s most significant market risk exposure is interest rate risk in its balance sheet; however, market risk
also includes product liquidity risk, price risk and volatility risk in BB&T’s lines of business. The primary objectives of
market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest
income, and to offset the risk of price changes for certain assets recorded at fair value.
Interest Rate Market Risk (Other than Trading)
BB&T actively manages market risk associated with asset and liability portfolios with a focus on the strategic pricing of
asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The goal of these
activities is the development of appropriate maturity and repricing opportunities in BB&T’s portfolios of assets and
liabilities that will produce consistent net interest income during periods of changing interest rates. These portfolios are
analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios.
The asset/liability management process is designed to achieve relatively stable net interest margins and assure liquidity by
coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. Among
other things, this process gives consideration to prepayment trends related to securities, loans and leases and certain
deposits that have no stated maturity. Prepayment assumptions are developed using market data for residential
mortgage-related loans and securities, and internal historical prepayment experience for client deposits with no stated
maturity and loans that are not residential mortgage related. These assumptions are subject to monthly back-testing, and
are adjusted as deemed necessary to reflect changes in interest rates relative to the reference rate of the underlying assets
or liabilities. On a monthly basis, BB&T evaluates the accuracy of its interest rate forecast simulation model, which
includes an evaluation of its prepayment assumptions, to ensure that all significant assumptions inherent in the model
appropriately reflect changes in the interest rate environment and related trends in prepayment activity. It is the
responsibility of the Market Risk and Liquidity Committee to determine and achieve the most appropriate volume and mix
of earning assets and interest-bearing liabilities, as well as to ensure an adequate level of liquidity and capital, within the
context of corporate performance goals. The Market Risk and Liquidity Committee also sets policy guidelines and
establishes long-term strategies with respect to interest rate risk exposure and liquidity. The Market Risk and Liquidity
Committee meets regularly to review BB&T’s interest rate risk and liquidity positions in relation to present and
prospective market and business conditions, and adopts funding and balance sheet management strategies that are
intended to ensure that the potential impact on earnings and liquidity as a result of fluctuations in interest rates is within
acceptable standards.
BB&T uses derivatives primarily to manage economic risk related to securities, commercial loans, mortgage servicing
rights and mortgage banking operations, long-term debt and other funding sources. BB&T also uses derivatives to
facilitate transactions on behalf of its clients. As of December 31, 2011, BB&T had derivative financial instruments
outstanding with notional amounts totaling $67.6 billion. The estimated net fair value of open contracts was a gain of $19
million at December 31, 2011. See Note 19 “Derivative Financial Instruments” in the “Notes to Consolidated Financial
Statements” herein for additional disclosures.
The majority of BB&T’s assets and liabilities are monetary in nature and, therefore, differ greatly from most commercial
and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and
actions of the Federal Reserve Board to regulate the availability and cost of credit have a greater effect on a financial
institution’s profitability than do the effects of higher costs for goods and services. Through its balance sheet management
function, which is monitored by the Market Risk and Liquidity Committee, management believes that BB&T is positioned
to respond to changing needs for liquidity, changes in interest rates and inflationary trends.
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