Fifth Third Bank 2011 Annual Report Download - page 54

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
52 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, and the Bancorp Credit division, led
by the Bancorp’s Chief Credit Officer, ensure 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 understands that not all
financial resources may persist as viable loss buffers over time.
Further, consideration must be given to planned or foreseeable
events that would reduce risk capacity. Those factors take the
form of capacity adjustments to arrive at an Operating Risk
Capacity. Operating Risk Capacity represents the operating risk
level the Bancorp can assume while maintaining its solvency
standard. The Bancorp's policy currently discounts its Operating
Risk Capacity by a minimum of five percent to provide a buffer; as
a result, the Bancorp's risk appetite is limited by policy to, at most,
95% of its Operating Risk Capacity.
Economic capital is the amount of unencumbered financial
resources required 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 Operating Risk
Capacity less the aforementioned buffer exceed the calculated
economic capital required in its business.
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 which 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
v
iew of risk. The department also leads the continual
fostering of a strong risk management culture and the
framework, policies and committees that support effective
risk governance, including the oversight of Sarbanes-Oxley
compliance;
• 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 rating methodology, 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;
• 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
Asset/Liability 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