PNC Bank 2012 Annual Report Download - page 119

model risk. These processes focus on identifying, reporting,
and remediating any problems with the soundness, accuracy,
improper use, or operating environment of our models. We
recognize that models must be monitored over time to ensure
their continued accuracy and functioning, and our policies also
address the type and frequency of monitoring that is
appropriate according to the importance of each model.
There are a number of practices we undertake to identify and
control model risk. A primary consideration is that models be
well understood by those who use them as well as by other
parties. Our policies require detailed written model
documentation for significant models to assist in making their
use transparent and understood by users, independent
reviewers, and regulatory and auditing bodies. The
documentation must include details on the data and methods
used to develop each model, assumptions utilized within the
model, and a description of model limitations and
circumstances in which a model should not be relied upon.
Our modeling methods and data are reviewed by independent
model reviewers not involved in the development of the model
to identify possible errors or areas where the soundness of the
model could be in question. Issues identified by the
independent reviewer are tracked and reported using our
existing governance structure until the issue has been fully
remediated. It is important that models operate in a controlled
environment where access to code or the ability to make
changes is limited to those so authorized. Additionally, proper
back-up and recovery mechanisms are needed for the ongoing
functioning of models. Our use of independent model control
reviewers aids in the evaluation of the existing control
mechanisms to help ensure that controls are appropriate and
are functioning properly.
Liquidity Risk Management
Liquidity risk has two fundamental components. The first is
potential loss assuming we were unable to meet our funding
requirements at a reasonable cost. The second is the potential
inability to operate our businesses because adequate
contingent liquidity is not available in a stressed environment.
We manage liquidity risk at the consolidated company level
(bank, parent company, and nonbank subsidiaries combined)
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, and to help
ensure that we maintain an appropriate level of contingent
liquidity.
Spot and forward funding gap analyses are used to measure
and monitor consolidated liquidity risk. Funding gaps
represent the difference in projected sources of liquidity
available to offset projected uses. We calculate funding gaps
for the overnight, thirty-day, ninety-day, one hundred eighty-
day and one-year time intervals. Management also monitors
liquidity through a series of early warning indicators that may
indicate a potential market, or PNC-specific, liquidity stress
event. Finally, management performs a set of liquidity stress
tests and maintains a contingency funding plan to address a
potential liquidity crisis. In the most severe liquidity stress
simulation, we assume that PNC’s liquidity position is under
pressure, while the market in general is under systemic
pressure. The simulation considers, among other things, the
impact of restricted access to both secured and unsecured
external sources of funding, accelerated run-off of customer
deposits, valuation pressure on assets, and heavy demand to
fund contingent obligations. Risk limits are established within
our Liquidity Risk Policy. Management’s Asset and Liability
Committee regularly reviews compliance with the established
limits.
Parent company liquidity guidelines are designed to help
ensure that sufficient liquidity is available to meet our parent
company obligations over the succeeding 24-month period.
Risk limits for parent company liquidity are established within
our Enterprise Capital and Liquidity Management Policy. The
Board of Directors’ Risk Committee regularly reviews
compliance with the established limits.
Bank Level Liquidity – Uses
Obligations requiring the use of liquidity can generally be
characterized as either contractual or discretionary. At the
bank level, primary contractual obligations include funding
loan commitments, satisfying deposit withdrawal requests and
maturities and debt service related to bank borrowings. As of
December 31, 2012, there were approximately $17.2 billion of
bank borrowings with contractual maturities of less than one
year. We also maintain adequate bank liquidity to meet future
potential loan demand and provide for other business needs, as
necessary. See the Bank Level Liquidity – Sources section
below.
Bank Level Liquidity – Sources
Our largest source of bank liquidity on a consolidated basis is
the deposit base that comes from our retail and commercial
businesses. Total deposits increased to $213.1 billion at
December 31, 2012 from $188.0 billion at December 31,
2011, primarily due to the RBC Bank (USA) acquisition.
Liquid assets and unused borrowing capacity from a number
of sources are also available to maintain our liquidity position.
Borrowed funds come from a diverse mix of short and long-
term funding sources.
At December 31, 2012, our liquid assets consisted of short-
term investments (Federal funds sold, resale agreements,
trading securities, and interest-earning deposits with banks)
totaling $7.5 billion and securities available for sale totaling
$51.1 billion. Of our total liquid assets of $58.6 billion, we
had $25.6 billion pledged as collateral for borrowings, trust,
and other commitments. The level of liquid assets fluctuates
over time based on many factors, including market conditions,
loan and deposit growth and active balance sheet
management, including securities purchases to manage
duration.
100 The PNC Financial Services Group, Inc. – Form 10-K