Fifth Third Bancorp : First Quarter 2024 Market Risk Disclosures

FIFTH THIRD BANCORP

MARKET RISK DISCLOSURES

For the quarter ended March 31, 2024

The Market Risk Rule

In order to better capture the risks inherent in trading positions, the Office of the Comptroller of the Currency (OCC), jointly with the Board of Governors of the Federal Reserve System (FRB) and the Federal Deposit Insurance Corporation (FDIC), issued revised market risk-based capital guidelines effective January 1, 2013. With more than $1 billion in gross market value of trading assets and liabilities, Fifth Third Bancorp (together with its subsidiaries, FITB or the Bancorp) is subject to the Federal Reserve's Market Risk Rule (MRR) and operates in compliance with its requirements.

The MRR defines market risk as the risk of loss on a position that could result from movements in market price. The MRR establishes regulatory capital requirements and sets out certain key market risk measurement and management techniques, including the need for calculating Value-at-Risk (VaR) and Stressed VaR (SVaR) for each covered position, stress testing, backtesting and independent market risk management. It requires that market risk on all covered positions be computed on a consistent basis to facilitate the aggregation and management of market risks across all trading businesses. To increase transparency and improve market discipline, the MRR requires that the Bancorp makes quantitative and qualitative disclosures regarding the calculation of its capital charge for exposure to general market risk on a regular basis.

The Market Risk Management Group manages FITB's day-to-day market risk management program, which includes documented and enforced market risk policies and risk limits. Market Risk Management is governed by FITB's Market Risk Management Committee, which is ultimately accountable to the Risk and Compliance Committee of FITB's Board of Directors.

Covered Positions

FITB captures and aggregates covered positions within a VaR framework. For this purpose, covered positions include positions in FITB's trading account. Trading activities are primarily customer-driven and are materially comprised of interest rate derivatives (IRD), foreign exchange contracts (FX), commodity contracts, loan trading, and Fifth Third Securities (FTS) trading inventory. In compliance with the Volcker Rule, FITB is prohibited from engaging in short-term propriety trading activities, subject to certain exemptions. FITB has exposure to various types of market risk including FX/commodity/equity price risk, credit risk, and interest rate risk for the trading account. Positions that are included in VaR calculations but missing a risk factor that the risk system is unable to capture due to lack of quality market data or system limitations is referred to as a "Risk Not in VaR" (RNIV). RNIV is only reported when the aggregate RNIV for the quarter exceeds a materiality threshold. A position for which FITB's risk system is unable to compute a meaningful VaR due to none of the risk factors being available, or the system being unable to appropriately handle the product, or due to FITB not having a Regulatory approved model is treated as a "Covered Position Not in VaR" (CPNIV). In order to compensate and ensure capital is reserved for these positions, CPNIV positions are reported at absolute fair market value at month end.

Transactions entered into for the management of FITB's balance sheet risk are not covered positions for the purpose of MRR. Commercial customers enter into IRD trades with FITB, and FITB typically enters into offsetting trades with approved bank counterparties to reduce or eliminate market risk. Similarly, FX and commodity price risk are generally minimal, as trades with customers are most often offset with opposite trades executed with approved financial services counterparties. Market risk can result when offsetting trades are not executed at the same time as the customer trades, or when there is a mismatch in coupon payments or the maturity structure. Another risk arises from the non-linear price characteristics of options positions and their sensitivity to the volatility of the underlying rates or prices. FTS originates, underwrites and distributes fixed income securities through its sales and trading staff. Although the typical hold period is very short term, this is FITB's only "long" portfolio and the main driver of VaR and risk-weighted assets (RWA). Inventory primarily consists of corporate and municipal bonds, agencies, mortgage-backed securities, treasuries and treasury futures. Fifth Third Loan Capital Markets supports FITB's new issue loan platform by making orderly secondary markets in the Bank's agented transactions, to facilitate trades between FITB's clients and to transact secondary buys and sells on behalf of FITB's various portfolios. Loan Trading engages in both principal and riskless loan transactions with investment banks, foreign and domestic commercial banks, insurance companies, retail loan funds, hedge funds and other buyside retail loan investors.

1. documented, well-enforced program of trading limits prohibits certain potential covered-position exposures and helps reduce model complexity. Market risk limits are set independently but with the concurrence of the lines of business and are reviewed by senior management on, at least, an annual basis. Limits on quantitative risk

measures, including VaR, are monitored on a daily basis and reported in dashboards along with limit exceptions, significant positions, and profit and loss attribution.

Valuation

Trading positions are generally valued on a mark-to-market basis using various third-party pricing sources. For the positions that are priced using a model approach, procedures ensure that valuations are consistent with observable market information. Trading positions are subject to independent price verification by Market Risk Management and are reported at fair value with changes reflected in income. For further information on the fair value of certain financial assets and liabilities, see Note 21 of the Notes to Condensed Consolidated Financial Statements in FITB's Quarterly Report on Form 10-Q for the quarter ended March 31, 2024. There have been no material changes to valuation policies, procedures and methodologies.

Value-at-Risk

VaR is the market risk measurement technique used to estimate the potential future loss on a portfolio that can be expected over a given time horizon at a specified level of certainty or confidence interval. FITB uses a Historical VaR methodology, which compares the actual volatility of risk factors such as rates, spreads and prices to the historical sensitivity of those factors. It captures empirical correlations within and across risk categories. FITB addresses all significant price risks within its VaR model, including basis risk as well as directional market risks.

For each trading portfolio, VaR is calculated on a daily basis using a 99% one-tailed confidence level. The 10-day VaR is calculated using the actual 10-day historical changes in risk factors; the Bancorp does not scale the 1-day VaR to calculate the 10-day VaR because scaling assumes that daily portfolio returns are independent and identically distributed. When this assumption is violated, the square root of time approximate is not appropriate. The model uses a rolling historical observation period of 250, 500, or 750 business days and the market data is updated and validated on a daily basis.

Stressed VaR

FITB uses the same internal VaR models to calculate a stressed VaR-based measure (SVaR), subject to the same confidence level and holding period, but with model inputs calibrated to historical data from a continuous 12-month period that reflects a period of significant financial stress. The SVaR supplements the VaR metric by mitigating the pro-cyclicality of the minimum capital requirements for market risk. The same time frame is used to calculate SVaR for each sub-portfolio and aggregate SVaR must be no less than the aggregate VaR.

The stress period selected is directly linked to the composition and directional basis of the current trading portfolio. FITB reviews the appropriateness of the 12-month stress period on a regular basis, considering changes in trading exposure, product offerings, business model, risk appetite, hedging strategy, etc. Market Risk Management maintains policies and procedures that describe how the stress period is calibrated, including empirical support for the current period.

CHART 1: Distribution of Daily 99% Confidence 10-Day Hold VaR Statistics for the Total Trading Portfolio

Specific Risk Measure

Specific risk is the risk of loss on a position that could result from factors other than broad market movements such as event risk, credit/default risk and idiosyncratic risk. FITB calculates the specific risk charge using the standardized measurement method, which measures specific risk pursuant to fixed risk weights as prescribed by the MRR. Specific risk is applicable for FITB's FTS and Loan Trading portfolios.

Capital Adequacy

FITB assesses capital adequacy on a regular basis, based on actual and estimated positions in both baseline and stressed scenarios. Multiple risk measures are aggregated to arrive at the total market risk-based component of the regulatory capital calculation, or Market Risk - Risk-Weighted Assets. For more information on FITB's regulatory capital calculation, see the "Capital Management" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in FITB's Quarterly Report on Form 10-Q for the quarter ended March 31, 2024. The following table summarizes the minimum capital requirement and RWA for market risk. Per policy, correlation trading is not allowed and as of March 31, 2024, FITB's covered positions did not contain any on- or off- balance sheet securitization positions as defined by the MRR. As such, the calculation does not include incremental or comprehensive risk charges.

Backtesting Results

FITB backtests the internal VaR models against the subsequent trading clean P&L on a daily basis using 99% confidence level non-scaled1-day hold VaR. Clean P&L assumes that end-of-day positions remain constant over the next business day (therefore excluding fees, commissions, reserves, net interest income and intraday trading), and also reflects changes in instrument liquidity and reduced marketability of unique positions. FITB also calculates the p-value of the gain or loss each day, that is the probability of observing a profit less than or a loss greater than the clean P&L calculation based on the internal VaR model. The p-value statistic provides information regarding the appropriateness of the entire P&L distribution and adds an explanatory power to the VaR metric.

Each quarter, FITB identifies the number of exceptions that have occurred over the last 250 business days, where the actual daily loss exceeded the corresponding daily VaR measurement. With a 99% confidence interval, it is expected that actual losses would exceed VaR one out of 100 trading days, or two to three times per year, on average. The following graph shows a comparison of the 99% 1-day VaR calculation to the daily clean P&L for the same positions. Over the past year, there were no backtesting exceptions at the aggregate level.

CHART 2: Total Trading Portfolio 1-Day Regulatory VaR versus Clean P&L1

1Note that clean PnL for 6-30-2023 is excluded from the above chart. June 30th 2023 marked the cessation of LIBOR when all the legacy client LIBOR deals also converted to SOFR. The bilateral cleared hedge legacy LIBOR trades transitioned on April 2023. This created a large one time IRD PnL of ~9MM on Jun 30th, which was well documented through the transition process from April 21st to Jun 30th. This was not a VaR backtesting exception.

Stress Testing

Since VaR cannot incorporate all possible risk outcomes and can understate the risk associated with severe events, stress testing helps capture sudden and dramatic changes in a portfolio's value given abnormal market conditions. On at least a monthly basis, FITB estimates the maximum loss for each trading portfolio by hypothesizing the portfolio's gain or loss given the recurrence of historical events and the occurrence of forward-looking hypothetical scenarios. All covered positions are captured in stress test models. Current positions and risk exposures are combined with the historical and hypothetical factor returns, taking into account historical correlations and volatilities among asset classes and risk factors. The model captures significant non-linearity within covered positions and explicitly considers instrument-level liquidity stresses.

The Bancorp attempts to identify reasonably feasible but severe market scenarios, considering the composition of covered positions and the nature of business strategies. For example, the Fifth Third Securities portfolio is most vulnerable to rising interest rates and periods of illiquidity. To stress this book, the Bancorp applies various shocks to yield curves and credit spreads. In FX and Commodities, the Bancorp stresses spot rates, forward curves and volatility surfaces. FITB uses stress test results to actively monitor market risk in its trading portfolios; results are communicated to senior management and limit violations are escalated. The models assume portfolios remain static; they do not capture how management would adjust positions if sudden, significant changes in market conditions were to occur.

Stress testing for the trading portfolio is also incorporated in firm-wide stress testing. The risk factors are the same in both models, but the values used in the firm-wide scenarios are updated to align with internal and regulatory guidance. In the individual trading portfolio stress tests, hypothetical shocks are instantaneous and current positions are held constant. The firm-wide analysis requires a forecast over a longer time horizon and may include certain assumptions about growth and changes in trading strategy.

Model Validation

It is the policy of FITB to have financial and quantitative models reviewed and validated by internal or external resources that are independent of development, implementation and operation of the model. The Model Risk Management Group (MRMG) evaluates the conceptual framework used by the VaR and the SVaR models, the assumptions underlying the models, and the sufficiency and completeness of the risk factors and historical market data used in the models. MRMG also performs independent validation of results when new models are implemented or existing methodology is changed. In addition, at least annually, an internal audit function independent of business line management and risk management assesses the effectiveness of the controls supporting market risk measurement systems, processes and management activities.

Disclosure Attestation

The Board of Directors and Senior Management are responsible for establishing an effective internal control structure over financial reporting, including disclosures required by the MRR. This disclosure is submitted in conjunction with the Quarterly Reports on Form 10-Q and the Annual Report on Form 10-K filings.