PNC Bank 2005 Annual Report Download - page 45

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The key to effective risk management is to be proactive in
identifying, measuring, evaluating, and monitoring risk on
an ongoing basis. Risk management practices support
decision-making, improve the success rate for new
initiatives, and strengthen the organization.
CORPORATE-LEVEL RISK MANAGEMENT OVERVIEW
We support risk management through a governance
structure involving the Board, senior management and a
corporate risk management organization.
Although our Board as a whole is responsible generally for
oversight of risk management, committees of the Board
provide oversight to specific areas of risk with respect to the
level of risk and risk management structure.
We use management level risk committees to help ensure
that business decisions are executed within our desired risk
profile. The Executive Risk Management Committee
(“ERMC”), consisting of senior management executives,
provides oversight for the establishment and implementation
of new comprehensive risk management initiatives, reviews
enterprise level risk profiles and discusses key risk issues.
The corporate risk management organization has the
following key roles:
• Facilitate the identification, assessment and
monitoring of risk across PNC,
• Provide support and oversight to the businesses,
and
• Identify and implement risk management best
practices, as appropriate.
Risk Measurement
We conduct risk measurement activities specific to each
area of risk. The primary vehicle for aggregation of
enterprise-wide risk is a comprehensive risk management
methodology that is based on economic capital. This
primary risk aggregation measure is supplemented with
secondary measures of risk to arrive at an estimate of
enterprise-wide risk. The economic capital framework is a
measure of potential losses above and beyond expected
losses. Potential one year losses are capitalized to a level
commensurate with a financial institution with an A rating
by the credit rating agencies. Economic capital incorporates
risk associated with potential credit losses (Credit Risk),
fluctuations of the estimated market value of financial
instruments (Market Risk), failure of people, processes or
systems (Operational Risk), and income losses associated
with declining volumes, margins and/or fees, and the fixed
cost structure of the business (Business Risk). We estimate
credit and market risks at an exposure level while we
estimate the remaining risk types at an institution or
business segment level. We routinely compare the output of
our economic capital model with industry benchmarks.
Risk Control Strategies
We centrally manage policy development and exception
oversight through corporate-level risk management.
Corporate risk management is authorized to take action to
either prevent or mitigate exceptions to policies and is
responsible for monitoring compliance with risk
management policies. The Corporate Audit function
performs an independent assessment of the internal control
environment. Corporate Audit plays a critical role in risk
management, testing the operation of the internal control
system and reporting findings to management and to the
Audit Committee of the Board.
Risk Monitoring
Corporate risk management reports on a regular basis to our
Board regarding the enterprise risk profile of the
Corporation. These reports aggregate and present the level
of risk by type of risk and communicate significant risk
issues, including performance relative to risk tolerance
limits. Both the Board and the ERMC provide guidance on
actions to address key risk issues as identified in these
reports.
CREDIT RISK MANAGEMENT
Credit risk represents the possibility that a customer,
counterparty or issuer may not perform in accordance with
contractual terms. Credit risk is inherent in the financial
services business and results from extending credit to
customers, purchasing securities, and entering into financial
derivative transactions. Credit risk is one of the most
common risks in banking and is one of our most significant
risks.
Approved risk tolerances, in addit ion to credit policies and
procedures, set portfolio objectives for the level of credit
risk. We have established guidelines for acceptable levels of
total borrower exposure, problem loans, and other credit
measures. We seek to achieve our credit portfolio objectives
by maintaining a customer base that is diverse in borrower
exposure and industry types. We use loan participations
with third parties, loan sales and syndications, and the
purchase of credit derivatives to reduce risk concentrations.
The credit granting businesses maintain direct responsibility
for monitoring credit risk within PNC. The Corporate Credit
Policy area provides independent oversight to the
measurement, monitoring and reporting of our credit risk
and reports to the Chief Risk Officer. Corporate Audit also
provides an independent assessment of the effectiveness of
the credit risk management process and adequacy of credit
risk profile.