MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARKET RISK MANAGEMENT  Economic Value of Equity  Net Interest Income Simulation Model Use of Derivatives to Manage Interest Rate Risk  58 Fifth Third Bancorp An integral component of the Bancorp’s interest rate risk  management strategy is its use of derivative instruments to  minimize significant fluctuations in earnings caused by changes in  market interest rates. Examples of derivative instruments that the  Bancorp may use as part of its interest rate risk management The Bancorp regularly evaluates its exposures to LIBOR and  Prime basis risks,  nonparallel shifts in the yield curve  and  embedded options risk. In addition, the impact on NII and EVE  of extreme changes in interest rates is modeled, wherein the  Bancorp employs the use of yield curve shocks and environment- specific scenarios.  This EVE profile suggests that the Bancorp would experience a slight adverse effect from an initial increase in rates,  and that the adverse impact would become greater as rates  continue to rise. While an instantaneous shift in interest rates is  used in this analysis to provide an estimate of exposure, the  Bancorp believes that a gradual shift in interest rates would have a  much more modest impact. Since EVE measures the discounted  present value of cash flows over the estimated lives of  instruments, the change in EVE does not directly correlate to the  degree that earnings would be impacted over a shorter time  horizon (e.g., the current fiscal year). Further, EVE does not take  into account factors such as future balance sheet growth, changes  in product mix, changes in yield curve relationships and changing  product spreads that could mitigate the adverse impact of changes  in interest rates. The NII simulation and EVE analyses do not  necessarily include certain actions that management may undertake to manage this risk in response to anticipated changes  in interest rates.  At December 31, 2010, the Bancorp’s simulated exposure to  a change in interest rates as described above reflects moderate  asset sensitivity in year one with increased asset sensitivity in year  two. Table 42 shows the Bancorp's estimated net interest income  sensitivity profile and ALCO policy limits as of December 31,  2010.  The Bancorp’s Executive ALCO, which includes senior  management representatives and is accountable to the Enterprise  Risk Management Committee, monitors and manages interest rate  risk within Board approved policy limits. In addition to the risk  management activities of ALCO, the Bancorp has a Market Risk  Management function as part of ERM that provides independent  oversight of market risk activities. The Bancorp’s interest rate risk  exposure is currently evaluated by measuring the anticipated  change in net interest income over 12-month and 24-month  horizons assuming a 100 bp parallel ramped increase and a 200 bp  parallel ramped increase in interest rates. The Fed Funds interest  rate, targeted by the Federal Reserve at a range of 0% to 0.25%, is  currently set at a level that would be negative in parallel ramped  decrease scenarios; therefore, those scenarios were omitted from  the interest rate risk analyses for December 31, 2010. In  accordance with the current policy, the rate movements are  assumed to occur over one year and are sustained thereafter.  The Bancorp employs a variety of measurement techniques to  identify and manage its interest rate risk, including the use of an  NII simulation model to analyze the sensitivity of net interest  income to changing interest rates. The model is based on  contractual and assumed cash flows and repricing characteristics  for all of the Bancorp’s financial instruments and incorporates  market-based assumptions regarding the effect of changing  interest rates on the prepayment rates of certain assets and  liabilities. The model also includes senior management projections  of the future volume and pricing of each of the product lines  offered by the Bancorp as well as other pertinent assumptions.  Actual results may differ from these simulated results due to  timing, magnitude and frequency of interest rate changes as well  as changes in market conditions and management strategies.  In addition to the direct impact of interest rate changes on net  interest income, interest rates can indirectly impact earnings  through their effect on loan demand, credit losses, mortgage  originations, the value of servicing rights and other sources of the  Bancorp’s earnings. Stability of the Bancorp’s net income is largely  dependent upon the effective management of interest rate risk.  Management continually reviews the Bancorp’s balance sheet  composition and earnings flows and models the interest rate risk,  and possible actions to reduce this risk, given numerous possible  future interest rate scenarios.  The Bancorp employs EVE as a measurement tool in managing  interest rate risk. Whereas the earnings simulation highlights  exposures over a relatively short time horizon, the EVE analysis  incorporates all cash flows over the estimated remaining life of all  balance sheet and derivative positions. The EVE of the balance  sheet, at a point in time, is defined as the discounted present value  of asset and derivative cash flows less the discounted value of  liability cash flows. The sensitivity of EVE to changes in the level  of interest rates is a measure of longer-term interest rate risk. EVE  values only the current balance sheet and does not incorporate the  growth assumptions used in the earnings simulation model. As  with the earnings simulation model, assumptions about the timing  and variability of balance sheet cash flows are critical in the EVE  analysis. Particularly important are the assumptions driving  prepayments and the expected changes in balances and pricing of  the transaction deposit portfolios. The following table shows the  Bancorp’s EVE sensitivity profile as of December 31, 2010.  Market risk arises from the potential for market fluctuations in  interest rates, foreign exchange rates and equity prices that may  result in potential reductions in net income. Interest rate risk, a  component of market risk, is the exposure to adverse changes in  net interest income or financial position due to changes in interest  rates. Management considers interest rate risk a prominent market  risk in terms of its potential impact on earnings. Interest rate risk  can occur for any one or more of the following reasons:  • Assets and liabilities may mature or reprice at different times;  • Short-term and long-term market interest rates may change  by different amounts; or • The expected maturity of various assets or liabilities may  shorten or lengthen as interest rates change.  Change in Interest Rates (bp)  Change in EVE  ALCO Policy Limits  +200  (1.62%)  (15.0)  +100 (0.50) +25  (0.09)  -25 (0.13)  Percent Change in NII  (FTE)  ALCO Policy Limits  Change in  Interest  Rates (bp)  12  Months  13 to 24 Months  12  Months  13 to 24   Months  +200  1.02%  4.99  (5.00)  (7.00)  +100 0.49 2.73 - - TABLE 42: ESTIMATED NII SENSITIVITY PROFILE  TABLE 43: ESTIMATED EVE SENSITIVITY PROFILE 