PNC Bank 2008 Annual Report Download - page 67

We approve counterparty credit lines for all of our trading
activities, including CDSs. Counterparty credit lines are
approved based on a review of credit quality in accordance
with our traditional credit quality standards and credit policies.
The credit risk of our counterparties is monitored in the
normal course of business. In addition, all counterparty credit
lines are subject to collateral thresholds and exposures above
these thresholds are secured.
Credit default swaps are included in the Free-Standing
Derivatives table in the Financial Derivatives section of this
Risk Management discussion. Net gains from credit default
swaps for proprietary trading positions, reflected in other
noninterest income in our Consolidated Income Statement,
totaled $45 million for 2008 and $38 million for 2007.
O PERATIONAL R ISK M ANAGEMENT
Operational risk is defined as the risk of financial loss or other
damage to us resulting from inadequate or failed internal
processes or systems, human factors, or from external events.
Operational risk may occur in any of our business activities
and manifests itself in various ways, including but not limited
to the following:
• Errors related to transaction processing and systems,
• Breaches of the system of internal controls and
compliance requirements, and
• Business interruptions and execution of unauthorized
transactions and fraud by employees or third parties.
Operational losses may arise from legal actions due to
operating deficiencies or noncompliance with contracts, laws
or regulations.
To monitor and control operational risk, we maintain a
comprehensive framework including policies and a system of
internal controls that is designed to manage risk and to
provide management with timely and accurate information
about the operations of PNC. Management at each business
unit is primarily responsible for its operational risk
management program, given that operational risk management
is integral to direct business management and most easily
effected at the business unit level. Corporate Operational Risk
Management oversees day-to-day operational risk
management activities.
Technology Risk
The technology risk management program is a significant
component of the operational risk framework. We have an
integrated security and technology risk management
framework designed to help ensure a secure, sound, and
compliant infrastructure for information management. The
technology risk management process is aligned with the
strategic direction of the businesses and is integrated into the
technology management culture, structure and practices. The
application of this framework across the enterprise helps to
support comprehensive and reliable internal controls.
Our business resiliency program manages the organization’s
capabilities to provide services in the case of an event that
results in material disruption of business activities.
Prioritization of investments in people, processes, technology
and facilities is based on different types of events, business
risk and criticality. Comprehensive testing validates our
resiliency capabilities on an ongoing basis, and an integrated
governance model is designed to help assure transparent
management reporting.
Insurance
As a component of our risk management practices, we
purchase insurance designed to protect us against accidental
loss or losses which, in the aggregate, may significantly affect
personnel, property, financial objectives, or our ability to
continue to meet our responsibilities to our various
stakeholder groups.
PNC, through subsidiary companies, Alpine Indemnity
Limited and Advent Guaranty Corporation, provides insurance
coverage for its general liability, automobile liability,
management liability, fidelity, employment practices liability,
special crime, workers’ compensation, property and terrorism
programs. PNC’s risks associated with its participation as an
insurer for these programs are mitigated through policy limits
and annual aggregate limits. Risks in excess of Alpine and
Advent policy limits and annual aggregates are mitigated
through the purchase of direct coverage provided by various
insurers up to limits established by PNC’s Corporate
Insurance Committee.
L IQUIDITY R ISK M ANAGEMENT
Liquidity risk is the risk of potential loss if we were unable to
meet our funding requirements at a reasonable cost. We
manage liquidity risk to help ensure that we can obtain cost-
effective funding to meet current and future obligations under
both normal “business as usual” and stressful circumstances.
Our largest source of liquidity on a consolidated basis is the
deposit base that comes from our retail and corporate and
institutional banking activities. Other borrowed funds come
from a diverse mix of short and long-term funding sources.
Liquid assets and unused borrowing capacity from a number
of sources are also available to maintain our liquidity position.
Liquid assets consist of short-term investments (federal funds
sold, resale agreements, trading securities, interest-earning
deposits with banks, and other short-term investments) and
securities available for sale. At December 31, 2008, our liquid
assets totaled $59.6 billion, with $22.5 billion pledged as
collateral for borrowings, trust, and other commitments.
Bank Level Liquidity
PNC Bank, N.A. and National City Bank can borrow from the
Federal Reserve Bank of Cleveland’s (“Federal Reserve
Bank”) discount window to meet short-term liquidity
requirements. These borrowings are secured by securities and
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