PNC Bank 2014 Annual Report Download - page 104

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. 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.
Management monitors liquidity through a series of early
warning indicators that may indicate a potential market, or
PNC-specific, liquidity stress event. In addition, management
performs a set of liquidity stress tests over multiple time
horizons with varying levels of severity and maintains a
contingency funding plan to address a potential stress event.
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.
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.
Liquidity-related risk limits are established within our
Enterprise Liquidity Management Policy and supporting
policies. Management committees, including the Asset and
Liability Committee, and the Board of Directors and its Risk
Committee regularly review compliance with key established
limits.
In addition to these liquidity monitoring measures and tools
described above, PNC also monitors its liquidity by reference
to the LCR, a new regulatory minimum liquidity requirement
designed to ensure that covered banking organizations
maintain an adequate level of liquidity to meet net liquidity
needs over the course of a 30-day stress scenario. The LCR is
calculated by dividing the amount of an institution’s high
quality, unencumbered liquid assets (HQLA), as defined and
calculated in accordance with the haircuts and limitations of
the LCR rules, by its estimated net cash outflow, with net cash
outflows determined by applying assumed outflow factors in
the LCR rules. The resulting quotient is expressed as a
percentage. For PNC and PNC Bank, the LCR became
effective January 1, 2015. The minimum required LCR and
the requirement to calculate the LCR on a daily basis will be
phased-in over a period of years. For 2015, PNC and PNC
Bank are required to calculate the LCR on a month-end basis
and the minimum LCR that PNC and PNC Bank are required
to maintain is 80%.
As of January 31, 2015, PNC and PNC Bank exceeded the
minimum LCR requirement in effect for 2015. The estimated
January 31, 2015 LCR calculation and the underlying
components are based on PNC’s current interpretation and
understanding of the final LCR rules and are subject to,
among other things, further regulatory guidance.
We provide additional information regarding regulatory
liquidity requirements and their potential impact on PNC in
the Supervision and Regulation section of Item 1 Business and
Item 1A Risk Factors of this Report.
Bank Level Liquidity – Uses
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, 2014, there were
approximately $7.2 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 generated by our retail and commercial
businesses. Total deposits increased to $232.2 billion at
December 31, 2014 from $220.9 billion at December 31, 2013,
primarily driven by growth in transaction deposits. Assets
determined by PNC to be liquid (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-term and long-term funding sources.
At December 31, 2014, our liquid assets consisted of short-
term investments (Federal funds sold, resale agreements,
trading securities and interest-earning deposits with banks)
totaling $36.0 billion and securities available for sale totaling
$44.2 billion. The level of liquid assets fluctuates over time
based on many factors, including market conditions, loan and
deposit growth and balance sheet management activities. Of
our total liquid assets of $80.2 billion, we had $6.1 billion of
securities available for sale and trading securities pledged as
collateral to secure public and trust deposits, repurchase
agreements and for other purposes. In addition to the liquid
assets we pledged, $4.8 billion of securities held to maturity
were also pledged as collateral for these purposes.
In addition to the customer deposit base, which has
historically provided the single largest source of relatively
stable and low-cost funding, the bank also obtains liquidity
through the issuance of traditional forms of funding including
long-term debt (senior notes and subordinated debt and FHLB
advances) and short-term borrowings (Federal funds
purchased, securities sold under repurchase agreements,
commercial paper issuances and other short-term borrowings).
86 The PNC Financial Services Group, Inc. – Form 10-K