PNC Bank 2014 Annual Report Download - page 109

Our total commitments totaled $146.8 billion at December 31,
2013. The increase in the comparison is primarily due to an
increase in exposure on net unfunded loan commitments
partially offset by a decline in reinsurance agreements and net
outstanding standby letters of credit. See Note 22
Commitments and Guarantees in the Notes To Consolidated
Financial Statements in Item 8 of this Report for additional
information on net unfunded loan commitments, our
reinsurance agreements, net outstanding standby letters of
credit, and certain other commitments.
Market Risk Management
Market risk is the risk of a loss in earnings or economic value
due to adverse movements in market factors such as interest
rates, credit spreads, foreign exchange rates and equity prices.
We are exposed to market risk primarily by our involvement
in the following activities, among others:
• Traditional banking activities of taking deposits and
extending loans,
• Equity and other investments and activities whose
economic values are directly impacted by market
factors, and
• Fixed income securities, derivatives and foreign
exchange activities, as a result of customer activities
and securities underwriting.
We have established enterprise-wide policies and
methodologies to identify, measure, monitor and report market
risk. Market Risk Management provides independent
oversight by monitoring compliance with these limits and
guidelines, and reporting significant risks in the business to
the Risk Committee of the Board.
Market Risk Management – Interest Rate Risk
Interest rate risk results primarily from our traditional banking
activities of gathering deposits and extending loans. Many
factors, including economic and financial conditions,
movements in interest rates and consumer preferences, affect
the difference between the interest that we earn on assets and
the interest that we pay on liabilities and the level of our
noninterest-bearing funding sources. Due to the repricing term
mismatches and embedded options inherent in certain of these
products, changes in market interest rates not only affect
expected near-term earnings, but also the economic values of
these assets and liabilities.
Asset and Liability Management centrally manages interest
rate risk as prescribed in our risk management policies, which
are approved by management’s Asset and Liability Committee
and the Risk Committee of the Board.
Sensitivity results and market interest rate benchmarks for the
fourth quarters of 2014 and 2013 follow:
Table 49: Interest Sensitivity Analysis
Fourth
Quarter
2014
Fourth
Quarter
2013
Net Interest Income Sensitivity Simulation (a)
Effect on net interest income in first year
from gradual interest rate change over
following 12 months of:
100 basis point increase 2.1% 2.2%
100 basis point decrease (1.0)% (.9)%
Effect on net interest income in second year
from gradual interest rate change over the
preceding 12 months of:
100 basis point increase 5.8% 7.4%
100 basis point decrease (5.7)% (3.8)%
Duration of Equity Model (a)
Base case duration of equity (in years) (4.6) (1.2)
Key Period-End Interest Rates
One-month LIBOR .17% .17%
Three-year swap 1.30% .88%
(a) Given the inherent limitations in certain of these measurement tools and techniques,
results become less meaningful as interest rates approach zero.
In addition to measuring the effect on net interest income
assuming parallel changes in current interest rates, we
routinely simulate the effects of a number of nonparallel
interest rate environments. Table 50 reflects the percentage
change in net interest income over the next two 12-month
periods assuming (i) the PNC Economist’s most likely rate
forecast, (ii) implied market forward rates and (iii) Yield
Curve Slope Flattening (a 100 basis point yield curve slope
flattening between 1-month and ten-year rates superimposed
on current base rates) scenario.
Table 50: Net Interest Income Sensitivity to Alternative Rate
Scenarios (Fourth Quarter 2014)
PNC
Economist
Market
Forward
Slope
Flattening
First year sensitivity 1.3% 1.0% (1.0)%
Second year sensitivity 5.3% 3.6% (4.8)%
All changes in forecasted net interest income are relative to
results in a base rate scenario where current market rates are
assumed to remain unchanged over the forecast horizon.
When forecasting net interest income, we make assumptions
about interest rates and the shape of the yield curve, the
volume and characteristics of new business and the behavior
of existing on- and off-balance sheet positions. These
assumptions determine the future level of simulated net
interest income in the base interest rate scenario and the other
interest rate scenarios presented in Tables 49 and 50 above.
The PNC Financial Services Group, Inc. – Form 10-K 91