Fifth Third Bank 2009 Annual Report Download - page 45

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 43
RISK MANAGEMENT
Managing risk is an essential component of successfully operating
a financial services company. The Bancorp’s risk management
function is responsible for the identification, measurement,
monitoring, control and reporting of risk and mitigation of those
risks that are inconsistent with the Bancorp’s risk profile. The
Enterprise Risk Management division (ERM), led by the
Bancorp’s Chief Risk Officer, ensures consistency in the
Bancorp’s approach to managing and monitoring risk within the
structure of the Bancorp’s affiliate operating model. In addition,
the Internal Audit division provides an independent assessment of
the Bancorp’s internal control structure and related systems and
processes.
The assumption of risk requires robust and active risk
management practices that comprise an integrated and
comprehensive set of activities, measures and strategies that apply
to the entire organization. The Bancorp has established a Risk
Appetite Framework that provides the foundations of corporate
risk capacity, risk appetite and risk tolerances. The Bancorp’s risk
capacity is represented by its available financial resources. Risk
capacity sets an absolute limit on risk-assumption in the Bancorp’s
annual and strategic plans. Our policy currently discounts our risk
capacity by five percent to provide a buffer; as a result, the
Bancorp’s risk appetite is limited by policy to 95% of our risk
capacity.
Economic capital is the amount of unencumbered financial
resources necessary to support the Bancorp’s risks. We measure
economic capital under the assumption that we expect to maintain
debt ratings at strong investment grade levels over time. Our
capital policies require that the economic capital necessary in our
business not exceed our risk capacity less the aforementioned
buffer.
Risk appetite is the aggregate amount of risk the Bancorp is
willing to accept in pursuit of its strategic and financial objectives.
By establishing boundaries around risk taking and business
decisions, and by incorporating the needs and goals of our
shareholders, regulators, rating agencies and customers, the
Bancorp’s risk appetite is aligned with its priorities and goals. The
formulation of risk appetite considers the Bancorp’s risk capacity,
its financial position, the resilience of its reputation and brand and
its core competencies. Risk tolerance is the maximum amount of
risk applicable to each of the eight specific risk categories included
in its Enterprise Risk Management Framework. This is expressed
both qualitatively, describing which risks may be taken, and
quantitatively, describing the magnitude of tolerance. The
Bancorp’s risk appetite and risk tolerances are supported by risk
targets and risk limits. Those limits are used to monitor the
amount of risk assumed at a granular level, which include key risk
indicators, performance indicators and quantitative metrics for
shocks and sensitivity measurements.
The risks faced by the Bancorp include, but are not limited to,
credit, market, liquidity, operational, regulatory compliance, legal,
reputational and strategic. Each of these risks are managed
through the Bancorp’s risk program, including an Enterprise Risk
Management Framework. ERM includes the following key
functions:
• Commercial Credit Risk Management provides safety
and soundness within an independent portfolio
management framework that supports the Bancorp’s
commercial loan growth strategies and underwriting
practices, ensuring portfolio optimization and
appropriate risk controls;
• Risk Strategies and Reporting is responsible for
quantitative analysis needed to support the commercial
dual grading system, allowance for loan and lease losses
(ALLL) methodology and analytics needed to assess
credit risk and develop mitigation strategies related to
that risk. The department also provides oversight,
reporting and monitoring of commercial underwriting
and credit administration processes. The Risk Strategies
and Reporting department is also responsible for the
economic capital program;
• Consumer Credit Risk Management provides safety and
soundness within an independent management
framework that supports the Bancorp’s consumer loan
growth strategies, ensuring portfolio optimization,
appropriate risk controls and oversight, reporting, and
monitoring of underwriting and credit administration
processes;
• Operational Risk Management works with the line of
business risk managers, affiliates and lines of business to
maintain processes to monitor and manage all aspects of
operational risk including ensuring consistency in
application of enterprise operational risk programs,
Sarbanes-Oxley compliance, and serving as a policy
clearinghouse for the Bancorp. In addition, the Bank
Protection function oversees and manages fraud
prevention and detection and provides investigative and
recovery services for the Bancorp;
• Capital Markets Risk Management is responsible for
instituting, monitoring, and reporting appropriate
trading limits, monitoring liquidity, interest rate risk, and
risk tolerances within the Treasury, Mortgage Company,
and Capital Markets groups and utilizing a value at risk
model for Bancorp market risk exposure;
• Regulatory Compliance Risk Management ensures that
processes are in place to monitor and comply with
federal and state banking regulations, including fiduciary
compliance processes. The function also has the
responsibility for maintenance of an enterprise-wide
compliance framework; and
• The ERM division creates and maintains other
functions, committees or processes as are necessary to
effectively manage risk throughout the Bancorp.
Risk management oversight and governance is provided by
the Risk and Compliance Committee of the Board of Directors
and through multiple management committees whose
membership includes a broad cross-section of line of business,
affiliate and support representatives. The Risk and Compliance
Committee of the Board of Directors consists of six outside
directors and has the responsibility for the oversight of risk
management for the Bancorp, as well as for the Bancorp’s overall
aggregate risk profile. The Risk and Compliance Committee of the
Board of Directors has approved the formation of key
management governance committees that are responsible for
evaluating risks and controls. The primary committee responsible
for the oversight of risk management is the Enterprise Risk
Management Committee (ERMC). Committees accountable to the
ERMC, which support the core risk programs, are the Corporate
Credit Committee, the Operational Risk Committee, the
Management Compliance Committee, the Executive Asset
Liability Management Committee and the Enterprise Marketing
Committee. Other committees accountable to the ERMC include
the Loan Loss Reserve Committee, Capital Committee and the
Retail Distribution Governance Committee. There are also new
products and initiatives processes applicable to every line of
business to ensure an appropriate standard readiness assessment is
performed before launching a new product or initiative.
Significant risk policies approved by the management governance