PNC Bank 2015 Annual Report Download - page 106

Our total commitments were $154.9 billion at December 31,
2014. The increase in the comparison is primarily attributable
to an increase in commitments to extend credit, partially offset
by declines in reinsurance agreements and net outstanding
standby letters of credit. See Note 21 Commitments and
Guarantees in the Notes To Consolidated Financial Statements
in Item 8 of this Report for additional information related to
our 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, commodity
prices and equity prices. We are exposed to market risk
primarily by our involvement in the following activities,
among others:
• Traditional banking activities of gathering 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 established
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 2015 and 2014 follow:
Table 44: Interest Sensitivity Analysis
Fourth
Quarter
2015
Fourth
Quarter
2014
Net Interest Income Sensitivity Simulation (a)
Effect on net interest income in first year
from gradual interest rate change over the
following 12 months of:
100 basis point increase 2.4% 2.1%
100 basis point decrease (1.9)% (1.0)%
Effect on net interest income in second year
from gradual interest rate change over the
preceding 12 months of:
100 basis point increase 5.3% 5.8%
100 basis point decrease (5.3)% (5.7)%
Duration of Equity Model (a)
Base case duration of equity (in years) (4.1) (4.6)
Key Period-End Interest Rates
One-month LIBOR .43% .17%
Three-year swap 1.42% 1.30%
(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 45 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 45: Net Interest Income Sensitivity to Alternative Rate
Scenarios (Fourth Quarter 2015)
PNC
Economist
Market
Forward
Slope
Flattening
First year sensitivity 4.1% 2.1% (1.7)%
Second year sensitivity 8.7% 3.9% (5.5)%
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 44 and 45 above.
These simulations assume that as assets and liabilities mature,
they are replaced or repriced at then current market rates. We
88 The PNC Financial Services Group, Inc. – Form 10-K