PNC Bank 2013 Annual Report Download - page 111

simulations assume that as assets and liabilities mature, they
are replaced or repriced at then current market rates. We also
consider forward projections of purchase accounting accretion
when forecasting net interest income.
The following graph presents the LIBOR/Swap yield curves
for the base rate scenario and each of the alternate scenarios
one year forward.
Table 52: Alternate Interest Rate Scenarios: One Year
Forward
1M
Interest Rate
0.0
Base Rates PNC Economist Market Forward Slope Flattening
1.0
2.0
3.0
4.0
2Y 3Y 5Y 10Y
The fourth quarter 2013 interest sensitivity analyses indicate
that our Consolidated Balance Sheet is positioned to benefit
from an increase in interest rates and an upward sloping
interest rate yield curve. We believe that we have the deposit
funding base and balance sheet flexibility to adjust, where
appropriate and permissible, to changing interest rates and
market conditions.
M ARKET R ISK M ANAGEMENT –C USTOMER -R ELATED
T RADING R ISK
We engage in fixed income securities, derivatives and foreign
exchange transactions to support our customers’ investing and
hedging activities. These transactions, related hedges and the
credit valuation adjustment (CVA) related to our customer
derivatives portfolio are marked-to-market on a daily basis
and reported as customer-related trading activities. We do not
engage in proprietary trading of these products.
We use value-at-risk (VaR) as the primary means to measure
and monitor market risk in customer-related trading activities.
We calculate a diversified VaR at a 95% confidence interval.
VaR is used to estimate the probability of portfolio losses
based on the statistical analysis of historical market risk
factors. A diversified VaR reflects empirical correlations
across different asset classes.
During 2013, our 95% VaR ranged between $1.7 million and
$5.5 million, averaging $3.5 million. During 2012, our 95%
VaR ranged between $1.1 million and $5.3 million, averaging
$3.2 million.
To help ensure the integrity of the models used to calculate
VaR for each portfolio and enterprise-wide, we use a process
known as backtesting. The backtesting process consists of
comparing actual observations of gains or losses against the
VaR levels that were calculated at the close of the prior day.
This assumes that market exposures remain constant
throughout the day and that recent historical market variability
is a good predictor of future variability. Our customer-related
trading activity includes customer revenue and intraday
hedging which helps to reduce losses, and may reduce the
number of instances of actual losses exceeding the prior day
VaR measure. There was one such instance during 2013 under
our diversified VaR measure where actual losses exceeded the
prior day VaR measure. In comparison, there were two such
instances during 2012. We use a 500 day look back period for
backtesting and include customer-related revenue.
The following graph shows a comparison of enterprise-wide
gains and losses against prior day diversified VaR for the
period indicated.
Table 53: Enterprise-Wide Gains/Losses Versus Value-at-
Risk
(10)
(5)
0
5
10
15
20
Millions
P&L
(20)
(15)
(10)
12/31/12 1/31/13 2/28/13 3/31/13 4/30/13 5/31/13 6/30/13 7/31/13 8/31/13 9/30/13 10/31/13 11/30/13 12/31/13
VaR
Total customer-related trading revenue was as follows:
Table 54: Customer-Related Trading Revenue
Year ended December 31
In millions 2013 2012
Net interest income $ 31 $ 38
Noninterest income 286 272
Total customer-related trading revenue $317 $310
Securities underwriting and trading (a) $ 78 $100
Foreign exchange 94 92
Financial derivatives and other 145 118
Total customer-related trading revenue $317 $310
(a) Includes changes in fair value for certain loans accounted for at fair value.
Customer-related trading revenues for 2013 increased $7
million compared with 2012. The increase primarily resulted
from the impact of higher market interest rates on credit
valuations for customer-related derivatives activities and
improved debt underwriting results which were partially offset
by reduced client sales revenue.
The PNC Financial Services Group, Inc. – Form 10-K 93