PNC Bank 2010 Annual Report Download - page 76
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Please find page 76 of the 2010 PNC Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.The decrease in the residential mortgages indemnification and
repurchase liability in 2010 and 2009 was reflective of lower
actual repurchase and indemnification losses driven primarily
by higher claim rescission rates. This decrease resulted despite
higher levels of investor indemnification and repurchase claim
activity as described above. The 2009 decrease in the home
equity loans/lines indemnification and repurchase liability
resulted primarily from the reduction in loss exposure
associated with pooled settlement activity. Conversely, the
2010 increase in this liability was attributable to
management’s estimate that higher anticipated losses will
result from higher forecasted volumes of asserted and
unasserted indemnification and repurchase claims.
We believe our indemnification and repurchase liabilities
adequately reflect the estimated losses on anticipated investor
indemnification and repurchase claims at December 31, 2010
and 2009. However, actual losses could be more or less than
our established indemnification and repurchase liability.
Factors that could affect our estimate include the timing and
frequency of investor claims driven by investor strategies and
behavior, our ability to successfully negotiate claims with
investors, the housing markets which drive the estimates made
for loan indemnification and repurchase losses, and other
economic conditions. Accordingly, if we assumed an adverse
change of 10% for the indemnification and repurchase claims,
claim rescission rates, and indemnification and repurchase
loss assumptions in our indemnification and repurchase
liability model, this liability would increase to $334 million at
December 31, 2010.
R
ISK
M
ANAGEMENT
We encounter risk as part of the normal course of our business
and we design risk management processes to help manage
these risks. This Risk Management section describes our risk
management philosophy, principles, governance and various
aspects of our corporate-level risk management program. We
also provide an analysis of our primary areas of risk: credit,
operational, liquidity, and market. The discussion of market
risk is further subdivided into interest rate, trading, and equity
and other investment risk areas. Our use of financial
derivatives as part of our overall asset and liability 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.
Risk Management Philosophy
PNC’s risk management philosophy is to manage to an overall
moderate level of risk to capture opportunities and optimize
shareholder value. We dynamically set our strategies and
make distinct risk taking decisions with consideration for the
impact to our aggregate risk profile. While, due to the
National City acquisition and the overall state of the economy,
our enterprise risk profile does not currently meet our desired
moderate risk level, we have made substantial progress in
returning to that level in 2009 and 2010.
Risk Management Principles
• Designed to only take risks consistent with our
strategy and within our capability to manage,
• Limit risk-taking by a set of boundaries,
• Practice disciplined capital and liquidity
management,
• Help ensure that risks and earnings volatility are
appropriately understood, measured and rewarded,
• Avoid excessive concentrations, and
• Help support external stakeholder confidence in
PNC.
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 Committee (EC), 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.
Corporate-Level Risk Management Program
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,
• Help identify and implement risk management best
practices, as appropriate, and
• Work with the lines of business to shape and define
PNC’s business risk limits.
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 losses associated
with declining volumes, margins and/or fees, and the fixed
cost structure of the business. We estimate credit and market
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