Risk Management Identification and Assessment of Bank of America

Risk Management Identification and Assessment of Bank of America

Bank of America Merrill Lynch (BAML) applies various forms of risk management procedures to control different risks because they face a variety of risks while carrying out their business operations. Effective managing of risks ensures the successful growth of an organization. "Risk management is the process of measuring, or assessing risk and then developing strategies to manage the risk. Risk management is very often applied in finance, but all large corporations have risk management teams and small groups and corporations practice informal, if not formal, risk management" (WordIQ.com, 2010, para. 1). An effective risk management program provides piece of mind for shareholders, management, employees, and the community related to the organization. The effectiveness of the risk management plan of Bank of America Merrill Lynch focuses on proactive measures and assessments of addressing potential risks such as operational, credit, and interest rate risks.

Operational Risk

The Bank of America Corporation (2005) website defines operational risk as "the risk of loss resulting from inadequate or failed internal processes, people, and systems, including system conversions and integration, and external events. Successful operational risk management is particularly important to a diversified financial services company like ours because of the very nature, volume, and complexity of our various businesses" (para. 1). The banking institution addresses potential operational risks proactively through the development of corporate-wide or line of business policies and procedures. These policies and procedures include controlling and monitoring tools providing measures to tackle operational risks. In 2005, the development of the Compliance and Operational Risk Committee (CORC), containing two groups, Compliance Risk Management and Enterprise Operational Risk, communicates and monitors the practices concentrating on operational and compliance issues (Bank of America Corporation, 2005). Training of management and employees on the policies, controls, and monitoring tools provides awareness of compliance and operational risks throughout the company. Furthermore, additional dedicated groups develop risk management practices for specific tasks such as information security programs and supplier programs to further ensure consistency of practices and procedures. "One tool the businesses and executive management utilize is a corporate-wide self-assessment process, which helps to identify and evaluate the status of risk issues, including mitigation plans, if appropriate. Its goal is to continuously assess changing market and business conditions and evaluate all operational risks impacting the line of business" (Bank of America Corporation, 2005, para. 4). This process identifies evolving operational risk trends and concerns and governs how to control these risks. Additionally, the dedicated Quality and Productivity team mitigates operational risk improvement efforts focusing on decreasing the variation of outputs through process management and process improvement.

Credit Risk

"The risk that a firm's customers and the parties to which it has lent money will delay or fail to make promised payments is known as credit risk. Most firms face some credit risk for account receivables" (Harrington & Neihaus, 2009, p. 5). BAML identifies credit risk associated with outstanding loans and leases, derivatives, trading account assets, and unfunded lending commitments that include letters of credit, loan commitments, and financial guarantees. According to the website maintained by Bank of America Corporation, "For derivative positions, we use the current mark-to-market value to represent credit exposure without giving consideration to future mark-to-market changes. Our consumer and commercial credit extension and review procedures take into account credit exposures that are both funded and unfunded" (2005, para. 1). Through creating risk profiles of each borrower, BAML manages credit risk through identifying repayment sources, nature of underlying collateral, and other support. This process demonstrates the ability to repay funds by the borrower. BAML classifies loans and leases as either consumer or commercial.

Consumer Credit Risk

Credit risk management for each consumer portfolio begins with complex initial underwriting and continues throughout the credit cycle of each loan. "Statistical techniques are used to establish product pricing, risk appetite, operating processes and metrics to balance risks and rewards" (Bank of America Corporation, 2005, para. 3). BAML compiles statistical data from external credit reports and historical consumer behavior. This analysis supplies the demonstration of past and present borrower credibility and ability to repay loans. Creating these models is essential to the credit risk management process in determining the approval or denial of credit decisions, collections procedures, management of consumer portfolios, and economic capital allocation for credit risk.

Commercial Credit Risk

Credit risk management for the commercial portfolio begins with a complex assessment of the credit risk profile established on an analysis of the financial position of the borrower. Every commercial transaction is appointed a risk rating and is subject to approval based on well-defined credit approval standards. Continuing to monitor these risk ratings permits any necessary changes attributable to changes in the financial conditions of the borrower (Bank of America Corporation, 2011). "Risk ratings are a factor in determining the level of assigned economic capital and the allowance for credit losses. In making decisions regarding credit, we consider risk rating, collateral, country, industry and single name concentration limits while also balancing the total borrower or counterparty relationship and SVA" (Bank of America Corporation,