Professional Documents
Culture Documents
2004 report
Managing Risk
Overview
Our management governance structure enables us to manage all major aspects of our business
through an integrated planning and review process that includes strategic, financial, associate and
risk planning. We derive much of our revenue from managing risk from customer transactions
for profit. Through our management governance structure, risk and return are evaluated with a
goal of producing sustainable revenue, reducing earnings volatility and increasing shareholder
value. Our business exposes us to the following major risks: strategic, liquidity, credit, market
and operational.
Strategic risk is the risk that adverse business decisions, ineffective or inappropriate business
plans or failure to respond to changes in the competitive environment, business cycles, customer
preferences, product obsolescence, execution and/or other intrinsic risks of business will impact
our ability to meet our objectives. Liquidity risk is the inability to accommodate liability
maturities and deposit withdrawals, fund asset growth and meet contractual obligations through
unconstrained access to funding at reasonable market rates. Credit risk is the risk of loss arising
from a borrower's or counterparty’s inability to meet its obligations. Market risk is the risk that
values of assets and liabilities or revenues will be adversely affected by changes in market
conditions, such as interest rate movements. Operational risk is the risk of loss resulting from
inadequate or failed internal processes, people and systems or external events.
Oversight
The Board evaluates risk through the Chief Executive Officer (CEO) and three committees. The
Finance Committee, a committee appointed by the Board, establishes policies and strategies for
managing the strategic, liquidity, credit, market and operational risks to corporate earnings and
capital. The Asset Quality Committee, a Board committee, reviews credit and selected market
risks; and the Audit Committee, a Board committee, provides direct oversight of the corporate
audit function and the independent registered public accounting firm. Additionally, senior
management oversight of our risk-taking and risk management activities is conducted through
three senior management committees: the Risk and Capital Committee (RCC), the Asset and
Liability Committee (ALCO) and the Credit Risk Committee (CRC). The RCC, a senior
management committee, reviews corporate strategies and corporate objectives, evaluates
business performance, and reviews business plans, including capital allocation, for the
Corporation and for major businesses. The ALCO, a subcommittee of the Finance Committee,
approves limits for trading activities, and was established to manage the risk of loss of value and
related Net Interest Income of our trading positions. ALCO also provides oversight for Corporate
Treasury’s and Corporate Investment’s process of managing interest rate risk, otherwise known
as the ALM process, and reviews hedging techniques. In addition, ALCO provides oversight
guidance over our credit hedging program. The CRC, a subcommittee of the Finance Committee,
establishes corporate credit practices and limits, including industry and country concentration
limits, approval requirements and exceptions. The CRC also reviews business asset quality
results versus plan, portfolio management, and the adequacy of the allowance for credit losses.
Each committee and subcommittee has the ability to delegate authority to officers of
subcommittees to manage specific risks.
Management is in the process of finalizing its plans to address the Basel Committee on Banking
Supervision's new risk-based capital standards (Basel II). The Finance Committee and the Audit
Committee provide oversight of management's plans including the Corporation's preparedness
and compliance with Basel II. For additional information, see Note 14 of the Consolidated
Financial Statements.
In 2005, the Finance Committee chartered the Compliance and Operational Risk Committee
(CORC) as a subcommittee of the Finance Committee. CORC provides oversight and consistent
communication of operational and compliance issues.
The following sections, Strategic Risk Management, Liquidity Risk Management, Credit Risk
Management, Market Risk Management and Operational Risk Management, address in more
detail the specific procedures, measures and analyses of the major categories of risk that we
manage.