PNC Bank 2011 Annual Report Download - page 23

uncertainty and we are closely monitoring regulatory
developments related to the Volcker Rule. The
manner in which the questions posed by the proposed
rules are addressed by the agencies will have an
important influence on the impact of the final rules
on PNC. Although PNC no longer has a designated
proprietary trading operation, the proposed rules
broadly define what constitutes potentially prohibited
“proprietary trading,” thereby making the scope of
the statutory and regulatory exemptions for trading
activities, including the exemptions for hedging
activities and customer trading, all the more
important. Until more is known about how the final
rules will define “proprietary trading” and the scope
of permissible trading activities, it is not possible to
determine the impact to PNC of the proprietary
trading prohibition. However, any meaningful
limitation on PNC’s ability to hedge its risks in the
ordinary course or to trade on behalf of customers
would likely be adverse to PNC’s business and
results of operations. In addition, the proposed rules
contain extensive compliance and recordkeeping
requirements related to permissible trading activities.
Such requirements, if included in a final rule, could
increase the costs of hedging or other types of
permissible transactions and potentially result in PNC
not engaging in certain transactions, or types of
transactions, in which we would otherwise engage.
With respect to the restrictions on private equity and
hedge fund activities, as of December 31, 2011, PNC
held interests in such funds likely to be covered
totaling approximately $880 million and sponsored
three such funds with total invested capital of
approximately $441 million. PNC expects that over
time it will need to eliminate these investments and
cease sponsoring these funds, although it is likely
that at least some of these amounts will reduce over
time in the ordinary course before compliance is
required, and the Volcker Rule also permits
extensions of the compliance date under some
circumstances. A forced sale of some of these
investments due to the Volcker Rule could result in
PNC receiving less value than it would otherwise
have received. Depending on the provisions of the
final rule, it is possible that other structures through
which PNC conducts business, such as operating
subsidiaries, joint ventures or securitization vehicles,
but that are not typically referred to as private equity
or hedge funds, could be restricted, with an impact
that cannot now be evaluated.
• Dodd-Frank requires the Federal Reserve to establish
enhanced prudential standards governing capital,
liquidity, risk management, stress testing and related
disclosures, and single-counterparty credit exposure
limits for bank holding companies and certain foreign
banking organizations with $50 billion or more in
consolidated total assets (“covered companies”).
Dodd-Frank also requires the Federal Reserve to
establish an “early remediation” regime for covered
companies under which the Federal Reserve must or
may take increasingly stringent actions against a
covered company as its financial health deteriorates.
In December 2011, the Federal Reserve requested
comment on proposed rules that would implement
these requirements for domestic covered companies,
including PNC. The proposed enhanced prudential
standards would include, among other things,
heightened liquidity risk management and stress
testing requirements; new standards governing
oversight by a covered company’s board of directors
and board-level risk committee; and new limits on
the aggregate amount of credit exposure a covered
company may have to any single customer or
counterparty. These proposed rules also would
establish an “early remediation” regime for covered
companies, under which the Federal Reserve would
be required to take increasingly stringent actions
against a covered company as its financial condition
or risk management deteriorated as reflected by the
company’s current or projected post-stress capital
levels, compliance with supervisory liquidity and risk
management standards and, in some instances,
market-based indicators, such as credit default swap
spreads. Comments on the proposed rules will be
accepted until at least March 31, 2012. Final rules
will not be issued until some time after such date, and
as such the impact of these rules cannot now be
evaluated. Many aspects of the rules, at least as
proposed, would not become effective until mid-2013
at the earliest.
• In addition, the relevant regulatory agencies have
proposed rules to implement the Dodd-Frank
provisions requiring retention of risk by certain
securitization participants through holding interests
in the securitization vehicles, but the rules are not yet
finalized or effective. As a result, the ultimate impact
of these Dodd-Frank provisions on PNC remains
unpredictable. That impact on PNC could be direct,
by requiring PNC to hold interests in a securitization
vehicle or other assets that represent a portion of the
credit risk of the assets held by the securitization
vehicle, or indirect, by impacting markets in which
PNC participates. Since the beginning of the financial
crisis, there has been and continues to be
substantially less private (that is, non-government
backed) securitization activity than had previously
been the case. It is unclear at present whether and to
what extent the private securitization markets will
rebound. In recent years PNC has only engaged in a
limited extent in securitization transactions under
circumstances where we might expect to be required
to retain additional risk on our balance sheet as a
14 The PNC Financial Services Group, Inc. – Form 10-K