PNC Bank 2012 Annual Report Download - page 226

Included in the customer, mortgage banking risk management,
and other risk management portfolios are written interest-rate
caps and floors entered into with customers and for risk
management purposes. We receive an upfront premium from
the counterparty and are obligated to make payments to the
counterparty if the underlying market interest rate rises above
or falls below a certain level designated in the contract. Our
ultimate obligation under written options is based on future
market conditions and is only quantifiable at settlement.
In connection with sales of a portion of our Visa Class B
common shares in 2012, we entered into swap agreements
with the purchaser in which we will make or receive payments
based on subsequent changes in the conversion rate of Class B
into Class A common shares and to make payments calculated
by reference to the market price of the Class A common
shares. The fair value of the swaps, included in Other
liabilities on our Consolidated Balance Sheet, was $43 million
at December 31, 2012.
Further detail regarding the derivatives not designated in
hedging relationships is presented in the tables that follow.
D ERIVATIVE C OUNTERPARTY C REDIT R ISK
By entering into derivative contracts we are exposed to credit
risk. We seek to minimize credit risk through internal credit
approvals, limits, monitoring procedures, executing master
netting agreements and collateral requirements. We generally
enter into transactions with counterparties that carry high
quality credit ratings. Nonperformance risk including credit
risk is included in the determination of the estimated net fair
value.
We generally have established agreements with our major
derivative dealer counterparties that provide for exchanges of
marketable securities or cash to collateralize either party’s
positions. At December 31, 2012, we held cash, U.S.
government securities and mortgage-backed securities totaling
$1.2 billion under these agreements. We pledged cash and
U.S. government securities of $978 million under these
agreements. To the extent not netted against derivative fair
values under a master netting agreement, the receivable for
cash pledged is included in Other assets and the obligation for
cash held is included in Other borrowed funds on our
Consolidated Balance Sheet.
The credit risk associated with derivatives executed with
customers is essentially the same as that involved in extending
loans and is subject to normal credit policies. We may obtain
collateral based on our assessment of the customer’s credit
quality.
We periodically enter into risk participation agreements to
share some of the credit exposure with other counterparties
related to interest rate derivative contracts or to take on credit
exposure to generate revenue. We will make/receive payments
under these agreements if a customer defaults on its obligation
to perform under certain derivative swap contracts. Risk
participation agreements are included in the derivatives table
that follows. Our exposure related to risk participations where
we sold protection is discussed in the Credit Derivatives
section below.
C ONTINGENT F EATURES
Some of PNC’s derivative instruments contain provisions that
require PNC’s debt to maintain an investment grade credit
rating from each of the major credit rating agencies. If PNC’s
debt ratings were to fall below investment grade, it would be
in violation of these provisions, and the counterparties to the
derivative instruments could request immediate payment or
demand immediate and ongoing full overnight
collateralization on derivative instruments in net liability
positions.
The aggregate fair value of all derivative instruments with
credit-risk-related contingent features that were in a net
liability position on December 31, 2012 was $1.1 billion for
which PNC had posted collateral of $942 million in the
normal course of business. The maximum amount of collateral
PNC would have been required to post if the credit-risk-
related contingent features underlying these agreements had
been triggered on December 31, 2012, would be an additional
$139 million.
The PNC Financial Services Group, Inc. – Form 10-K 207