AmazonScience/document-haystack

1our capital consistent with these regulatory principles, and we believe that our December 31, 2023 capital levels were aligned with 2them.3We provide additional information regarding regulatory capital requirements and some of their potential impacts, including the 4proposed rules to adjust the Basel III framework, in the Supervision and Regulation section of Item 1 Business, Item 1A Risk Factors 5and Note 19 Regulatory Matters.6Market Risk Management7Market risk is the risk of a loss in earnings or economic value due to adverse movements in market factors such as interest rates, credit 8spreads, foreign exchange rates, commodity prices and equity prices. We are exposed to market risk primarily by our involvement in 9the following activities, among others:10• Traditional banking activities of gathering deposits and extending loans,11• Fixed income securities, derivatives and foreign exchange activities, as a result of customer activities, securities underwriting 12and our investment portfolio, and13• Other investments, including equity, and activities whose economic values are directly impacted by market factors.14We have established enterprise-wide policies and methodologies to identify, measure, monitor and report market risk. Market Risk 15Management provides independent oversight by monitoring compliance with established guidelines and reporting significant risks in 16the business to management committees and, where appropriate, the Risk Committee of the Board of Directors.17Market Risk Management – Interest Rate Risk18Interest rate risk results primarily from our traditional banking activities of gathering deposits and extending loans. Many factors, 19including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the 20interest that we earn on assets and the interest that we pay on liabilities and the level of our noninterest-bearing funding sources. Due 21to the repricing term mismatches and embedded options inherent in certain of these products, changes in market interest rates not only 22affect expected near-term earnings, but also the economic values of these assets and liabilities.23Our Asset and Liability Management group centrally manages interest rate risk as prescribed in our market risk-related risk 24management policies, which are approved by management’s ALCO and the Risk Committee of the Board of Directors.25PNC utilizes sensitivities of NII and EVE to a set of interest rate scenarios to identify and measure its short-term and long-term 26structural interest rate risks.27NII sensitivity results for the fourth quarters of 2023 and 2022 follow:28Table 31: Net Interest Income Sensitivity Analysis29Fourth Quarter 2023 Fourth Quarter 202230Net Interest Income Sensitivity Simulation (a)31Effect on NII in the first year from shocked interest rate:32200 basis point instantaneous increase  (0.2) %  4.7 %33200 basis point instantaneous decrease  (0.3) % (5.7)%34(a) The effect on NII in the first year from a 100 basis point instantaneous increase or decrease is not materially different from the 200 basis point scenarios as disclosed above.35When forecasting net interest income, we make certain key assumptions that can materially impact the resulting sensitivities, including 36the following:37Future Balance Sheet Composition: Our balance sheet composition is dynamic and based on our forecasted expectations. As of the 38fourth quarter 2023, the projected balance sheet composition by the end of year one is generally consistent with the spot composition 39as of the fourth quarter 2023. 40Deposit Betas: Deposit pricing changes are primarily driven by changes in the Federal Funds rate, with the relationship between 41deposit rates and Federal Funds rate defined as deposit beta. We define cumulative deposit beta as the change in deposit rate paid on 42interest bearing non-maturity deposits divided by the change in the upper level of the stated Federal Funds rate range since the first 43quarter of 2022, the start of the current rising rate cycle. As of December 2023, PNC’s cumulative deposit beta was 44%, an increase 44from 31% at December 2022. For interest rate risk modeling, PNC uses dynamic beta models to adjust assumed repricing sensitivity 45depending on market rate levels as well as other factors. The dynamic beta assumptions reflect historical experience and future 46expectations. Our scenario assumes that deposit betas slightly increase from current levels. Actual deposit rate paid may differ from 47modeled projections due to variables such as competition for deposits and customer behavior.48 49The PNC Financial Services Group, Inc. –  2023 Form 10-K  75