Fifth Third Bank 2010 Annual Report Download - page 50

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
48 Fifth Third Bancorp
RISK MANAGEMENT
Managing risk is an essential component of successfully operating
a financial services company. The Bancorp’s risk management
approach includes processes for identifying, assessing, managing,
monitoring and reporting risks. The ERM division, led by the
Bancorp’s Chief Risk Officer, ensures the consistency and
adequacy of the Bancorp’s risk management approach 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. The Bancorp’s policy currently
discounts its risk capacity by five percent to provide a buffer; as a
result, the Bancorp’s risk appetite is limited by policy to 95% of its
risk capacity.
Economic capital is the amount of unencumbered financial
resources necessary to support the Bancorp’s risks. The Bancorp
measures economic capital under the assumption that it expects to
maintain debt ratings at strong investment grade levels over time.
The Bancorp’s capital policies require that the economic capital
necessary in its business not exceed its 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 its
shareholders, regulators, rating agencies and customers, the
Bancorp’s risk appetite is aligned with its priorities and goals. 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 primarily in qualitative
terms. 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.
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 is managed through
the Bancorp’s risk program. ERM includes the following key
functions:
• Enterprise Risk Management Programs is responsible
for developing and overseeing the implementation of risk
programs and reporting that facilitate a broad integrated
view of risk. The department also leads the ongoing
development of a strong risk management culture and the
framework, policies and committees that support effective
risk governance;
• 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, 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 affiliates and
lines of business to maintain processes to monitor and
manage all aspects of operational risk including ensuring
consistency in application of operational risk programs
and Sarbanes-Oxley compliance;
• Bank Protection 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 Treasury, Mortgage, 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 five 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 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 oversee the ALLL, capital and community
reinvestment act/fair lending functions. 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
committees are also reviewed and approved by the Risk and
Compliance Committee of the Board of Directors.
Finally, Credit Risk Review is an independent function
responsible for evaluating the sufficiency of underwriting,
documentation and approval processes for consumer and
commercial credits, the accuracy of risk grades assigned to