Fifth Third Bank 2012 Annual Report Download - page 58

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
56 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 which
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 processes related
to fiduciary, community reinvestment act and fair lending
compliance. 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