PNC Bank 2006 Annual Report Download - page 58

risk management process is also addressed within the Risk
Management section of this Item 7. In appropriate places
within this section, historical performance is also addressed.
O VERVIEW
As a financial services organization, we take a certain amount
of risk in every business decision. For example, every time we
open an account or approve a loan for a customer, process a
payment, hire a new employee, or implement a new computer
system, we incur a certain amount of risk. As an organization,
we must balance revenue generation and profitability with the
risks associated with our business activities. Risk management
is not about eliminating risks, but about identifying and
accepting risks and then effectively managing them so as to
optimize shareholder value.
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 market’s confidence in an organization.
C ORPORATE -L EVEL R ISK M ANAGEMENT O VERVIEW
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.
C REDIT R ISK M ANAGEMENT
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 addition 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
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