=5m

constitute conditions imposed in writing in connection with this action and, as
such, may be enforced in proceedings under applicable law.

If you have any questions regarding this matter, please contact Pam
Nardolilli at (202) 452-3289, Chris Callanan at (202) 452-3594, Lucy Chang at
(202) 475-6331, or Jeffery Zhang at (202) 736-1968, all of the Board’s Legal
Division, or Page Conkling at (202) 912-4647 of the Board’s Division of
Supervision and Regulation.

Sincerely yours,

ingore MieClosey Shanks
Deputy Secretary of the Board


-4-

financial exposure to the counterparty.'' The Board also explained that this
valuation approach to equity investments is consistent with the general treatment
under U.S. generally accepted accounting principles for available-for-sale or
trading securities.

An exemption permitting PNC to value its equity investment in
BlackRock at carrying value would be in the public interest because it would align
PNC’s credit exposure to BlackRock for purposes of the Board’s SCCL rule with
PNC’s actual economic and financial exposure to BlackRock from this investment.
Use of a more accurate measurement of the credit exposure of PNC resulting from
its investment in BlackRock would allow PNC to manage its economic exposure
more efficiently, which would be in the public interest and consistent with the
purposes of section 165(e). Permitting PNC to value its equity investment in
BlackRock at carrying value also would be consistent with other Board
regulations, including the Board’s risk-based capital rules,'? as well as with PNC’s
public filings and reports, enhancing transparency to the public.'? Importantly,
because PNC is required under the risk-based capital rules to value its investment
in BlackRock at carrying value, any direct decline in PNC’s regulatory capital that
might occur as the result of a hypothetical collapse in the value of its BlackRock
investment would be limited to carrying value.

In light of these considerations and all the facts presented, the
requested exemption appears to be consistent with the purposes of section 165(e)
and in the public interest. Accordingly, the Board hereby grants the requested
exemption.

This action is based on the representations made in your request,
related correspondence, and other supervisory information and on the
commitments provided in connection with the proposal. The commitments

"' Bd. of Governors of the Fed. Reserve Sys., Single-Counterparty Credit Limits
for Bank Holding Companies and Foreign Banking Organizations, 83 Fed. Reg.
38460, 38473 (Aug. 6, 2018).

'2 See 12 CFR part 217; see also 12 CFR 223.23.



BOARD OF GOVERNORS

OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD

July 31, 2019

Kieran J. Fallon, Esq.

Senior Deputy General Counsel

Government, Regulatory Affairs & Enterprise Risk
The PNC Financial Services Group, Inc.

800 17th Street NW

PNC Place, 12th Floor

Washington, D.C. 20006

Dear Mr. Fallon:

This is in response to the request by The PNC Financial Services
Group, Inc. (PNC), Pittsburgh, Pennsylvania, for a partial exemption from the
definition of “credit exposure” for purposes of section 165(e) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the
Board’s single-counterparty credit limits (SCCL) rule with respect to PNC’s
investment in BlackRock, Inc., New York, New York, a publicly traded investment
management firm with $5.98 trillion in assets under management as of
December 31, 2018.!

Pursuant to section 165(e) of the Dodd-Frank Act, the Board has
established SCCL for domestic and foreign bank holding companies with total
consolidated assets equal to or exceeding $250 billion.2 A U.S. bank holding

' 12 U.S.C. § 5365(e); 12 CFR part 252, subpart H; BlackRock, Inc., Annual
Report (Form 10-K), at 1 (Feb. 28, 2019).

> 12 CFR part 252, subparts H and Q. The SCCL rule generally is consistent with
the Basel Committee on Banking Supervision’s large exposures standard, which
establishes an international standard for credit exposure limits applicable to
internationally active banks. Basel Committee on Banking Supervision,
Supervisory Framework for Measuring and Controlling Large Exposures

(April 2014).


=2e

company (BHC) with total consolidated assets equal to or exceeding $250 billion
that is not a global systemically important bank holding company generally is
limited in its aggregate net credit exposure to a single counterparty to 25 percent of
the BHC’s tier | capital. As of December 31, 2018, PNC’s tier 1 capital was
approximately $34.7 billion. Therefore, its SCCL is approximately $8.7 billion.

PNC owns common and preferred shares of BlackRock representing
approximately 22 percent of BlackRock’s outstanding voting securities and total
equity. BlackRock is not consolidated with PNC for financial reporting purposes.
Therefore, BlackRock is considered a counterparty of PNC for purposes of the
Board’s SCCL rule, and the exposures of PNC to BlackRock are subject to the
limits in the SCCL rule.*

PNC accounts for its investment in the BlackRock equity securities
under the equity method of accounting. Under the equity method of accounting,
the book value of an investment is recorded initially at cost on the investor’s
balance sheet and then is adjusted at subsequent measurement dates for dividends
received by the investor from the company and for the investor’s pro rata share of
the net income or losses of the company. Specifically, the investor would reduce
the book value of its investment for any dividends received from the company and
for its pro rata share of any losses incurred by the company and would increase the
book value of its investment for its pro rata share of any earnings of the company.
Under the equity method of accounting, the market value of an investment can
have an impact on the investor’s financial statements in only limited
circumstances.°

Under the SCCL rule, a BHC would value credit exposure due to
equity investments in the counterparty at the market value of the investment.° The
market value of the BlackRock shares that PNC controls is approximately

3 12 CFR 252.72(a).
4 Td.

> Although an investment accounted for under the equity method of accounting
would not be adjusted for changes in market value, such an investment generally
must be evaluated periodically for impairment. A decline in the investment’s
market value (e.g., to a value below its book value) may indicate a possible
impairment and may require a write-down of the value of the investment.

6 12 CFR 252.73(a)(3).


2Be

$13.7 billion.” This amount would exceed PNC’s credit limit for a single
counterparty.

Under U.S. generally accepted accounting standards, an investor must
account for an investment in the common stock (or equivalent) of another company
under the equity method of accounting if the investor has the ability to exercise
“significant influence” over the other company but does not have a “controlling
financial interest” in that company.® As of December 31, 2018, the value of PNC’s
BlackRock investment under the equity method of accounting was $8.2 billion.’

Section 165(e) of the Dodd-Frank Act authorizes the Board by order
or regulation to exempt transactions, in whole or in part, from the definition of
“credit exposure” for purposes of that section, if the Board finds that the exemption
is in the public interest and is consistent with the purpose of that subsection.'°

Under the SCCL rule, equity investments are valued at market value.
Valuing such equity investments at market value requires the firm to revalue
upwards or downwards the amount of an investment in such securities when the
market value of the securities increases or decreases, respectively. When the
Board adopted the SCCL rule, the Board explained that a market value valuation
rule for equity investments generally is appropriate to reflect the firm’s changing

7 The PNC Financial Services Group, Inc., Annual Report (Form 10-K), at 50
tbl. 12 (Mar. 1, 2019).

8 See Financial Accounting Standards Board Accounting Standards Codification
323, Investments — Equity Method and Joint Ventures. A “controlling financial
interest” is generally determined based on whether the investor has the unilateral
right to make significant financial and operating decisions about the company in
which the investment is made. If it is determined that an investment represents a
controlling financial interest, the investor must consolidate the entity. As noted,
PNC does not consolidate BlackRock for accounting purposes.

° The PNC Financial Services Group, Inc., Annual Report (Form 10-K), at 50
tbl. 12 (Mar. 1, 2019). PNC has recognized a deferred tax liability related to this
investment of $1.7 billion, as of December 31, 2018. Id. at tbl. 12 n.(c).

1 12 U.S.C. § 5365(e)(6); see also 12 CFR 252.77(c), 252.177(b).