PNC Bank 2014 Annual Report Download - page 110

These 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 51: 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 2014 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.
Market Risk Management – Customer-Related Trading
Risk
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 daily 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 2014, our 95% VaR ranged between $.8 million and
$3.9 million, averaging $2.1 million. During 2013, our 95%
VaR ranged between $1.7 million and $5.5 million, averaging
$3.5 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 were two instances during 2014 under
our diversified VaR measure where actual losses exceeded the
prior day VaR measure. In comparison, there was one such
instance during 2013. We use a 500 day look back period for
backtesting and include customer-related trading revenue.
The following graph shows a comparison of enterprise-wide
gains and losses against prior day diversified VaR for the
period indicated.
Table 52: Enterprise – Wide Gains/Losses Versus Value-at-
Risk
(10)
(5)
0
5
10
15
20
Millions
P&L
(20)
(15)
(10)
VaR
12/31/13 1/31/14 2/28/14 3/31/14 4/30/14 5/31/14 6/30/14 7/31/14 8/31/14 9/30/14 10/31/14 11/30/14 12/31/14
Total customer-related trading revenue was as follows:
Table 53: Customer-Related Trading Revenue (a)
Year ended December 31
In millions 2014 2013
Net interest income $ 31 $ 30
Noninterest income 147 234
Total customer-related trading revenue $178 $264
Securities trading (b) $ 33 $ 21
Foreign exchange 96 98
Financial derivatives and other 49 145
Total customer-related trading revenue $178 $264
(a) Customer-related trading revenues exclude underwriting fees for both periods
presented.
(b) Includes changes in fair value for certain loans accounted for at fair value.
Customer-related trading revenues for 2014 decreased $86
million compared with 2013. The decrease was primarily due
to market interest rate changes impacting credit valuations for
customer-related derivatives activities and reduced derivatives
client sales revenues, which were partially offset by improved
securities and foreign exchange client sales results.
92 The PNC Financial Services Group, Inc. – Form 10-K