RISK MANAGEMENT PROJECT- PART 5- Bank Lending Practices

Table of Contents

Executive Summary 3

Introduction 3

Banking Risks 4

People risks 5

Financial risks 5

Operational risks 6

Risk mitigation 6

Bank of Americas board of directors 7

Bank of America’s executive committee 7

Sarbanes-Oxley Act and other legislation 8

Asset-liability management 8

Credit risks faced by retail banking 9

Credit risks associated with individuals and institutions 9

Retail banking services for individuals 9

Retail banking services for institutions 10

Bank Assessment of Credit Risk 10

References 11

Executive Summary

The banking sector is a very risky venture that is full of challenges. There are various risks that emerge in the course of the business, and the firm has to look for ways to mitigate these risks. Different types of risks are common in the banking sector ranging from credit risk, operational risks, sovereign risk, trade risk, interest rate risk, and foreign exchange risk among others. These risks are brought about by different factors, and there is a need for them to be addressed as soon as possible. The Bank of America has been one of the core financial institutions in the world having over five thousand bank centers globally. The bank is faced with different forms of risks, and it has come up with various ways to address the challenges that they face. The bank observes the Sox Act strictly to cater for accountability and transparency in the financial sector.

Introduction

The banking risk is exposure that might result to uncertainty of the outcome. There are various risk types that are categorized based on different aspects such as the causes and the area affected. These types are operational risk, credit risk, sovereign risk, trade risk, foreign exchange risk, and interest rate risk. Risk trends are various changes that occur in these types of risks and they are most influenced by the changes in the economy among other factors. Risk mitigation. Credit risk is the exposure that the creditors bear when lend money to individuals. Lending practices vary among lending institutions change and are influenced by various factors. Capitalization refers to when the cost of acquisition of the assets are expensed over the period over life of the asset instead of the period it was incurred. Solvency is the ability of a firm to meet long term financial obligations.

Bank of America is a multinational bank that has its headquarters in the United States. This bank offers banking and financial services and has its headquarters in Charlotte in North Carolina. The bank offers its products also services through 5100 bank centers as well as 16300 ATMs, online, mobile banking platforms as well as call centers. The company offers products such as consumer banking, finance, and insurance, mortgage loans, private equity, investment banking, corporate banking, wealth management, private banking as well as credit cards. The aim of this paper is to create a risk management plan for the Bank of America.

There are strategic, operational, finance as well as compliance risks that are associated with the Bank of America as well as the banking industry in general. Banks are faced with various types of risks in the process of their operation. The risks include credit risk, market risk, operational risks, liquidity risks business risk, reputational risks and many others (James, 2012).

The banking industry has encountered some risks that have emerged in the recent times that were not considered as important previously. Regulators demand that banks understand these risks to ensure that solutions are obtained to help in managing these risks. Some of the key emerging risks include corporate governance risks, quality of assets, dangers of gearing and over-leverage, risks of inadequate risk transfer and many other trending risks.

According to a recent report is that banks have continued to ease their lending standards as well as terms in the past three months which have increased their risks. Banks have not altered the lending standards for home equity lines of credit in accordance to what the FED recommended.

Credit is the likelihood that a loan borrower from a bank will not meet their obligations to the bank or will not repay the loan at the required time. This risk is very common, and it requires mitigation by ensuring that the risks are covered by insurance company. Capitalization and solvency are essential to banks. Capitalization indicates that the amount of capital it holds a solvency shows the whether the bank can meet its long-term liabilities.

Banking Risks

Bank of America is an American bank that offers various products as well as services all over the world. This bank has its headquarters in North Carolina.

People risks

There are huge risks that are experienced by Bank of America since it deals with money. People risks associated with Bank of America are numerous. Bank of America deal with people including employees, creditors, debtors and others. Employees can be a source of great risks especially when they expose confidential information to the public. The information can be accessed by criminals who can cause a great loss in regards to the company’s information and money. Debtors are people who can result in great risks when they fail to repay their debts together with interests, and this affects the existence of the bank. Creditors affect the bank when they withdraw their money at once to go to other Bank of America or use their money. This situation causes a company to have less amount of money to lend, and this can affect the bank's existence. The managers of a bank can also put a bank in risks by making wrong decisions by doing things that put the bank's existence in jeopardy

Financial risks

There are different types of financial risks that are faced by Bank of America. One risk involves the bank paying its creditors. Bank of America usually use the money of clients who deposit their money in bank accounts to lend to borrowers. Bank of America create money by charging interest on loans and therefore return their clients’ money and also pays a small percentage of interest. When creditors withdraw their money at one time, the bank lacks money to lend, and this increases the risk to a bank as it can become bankrupt (Fight, 2014).

The other risk is recovering money from debtors. Bank of America get funds from the interest that they charge for loans and when debtors fail to pay the bank can be in trouble since it needs the money to pay creditors as well as get its operating cash. Errors that are caused by people and machines can be a source of great risks as the bank can lose money.

Operational risks

Operational risks are termed as risks of losses that may result from the processes that are inadequate or that have failed. Additionally, these risks may be attributed to people, external events, and systems. The operational risks that might be associated with the Bank of America may emanate from the installation of new systems of banking that have not yet been tested. Operational risks may also result from the failure of the management to take seriously the recommendations that have been made regarding the improvement of operations within the bank. The failure of people to exercise responsibility in their behavior as well as exercising high levels of professionalism is one of the major ways that may trigger the emergence of the operational risks because the processes within will not be running the way they are expected to operate. Ethical values and integrity have to be upheld at all time to ensure that there is smooth running of all processes within the bank.

Risk mitigation

Mitigation of the risks is finding strategies that will prevent the emergence of these risks as well as the way to address them if they happen. Proper record management is one of the ways that can be applied in risks management to help in ensuring that records are kept well for references especially in handling matters to do with finances. Credit management is another approach applied in risk management since it assists in keeping a trail of the credit advanced to the customers of the bank. Healthy credit management is likely to enhance the success of the bank. Insurance policies for the bank are one of the ways applied to mitigate the risks. Insurance also makes sure that when these risks occur and cause loss, the bank is compensated. Due diligence is applied as a mitigation strategy of researching on the ways to improve the performance and understanding the risks that may come along the way (Information Resources Management Association, 2015).

Bank of Americas board of directors

Bank of America is a monetary institution that has been very successful due to its key people who mitigate risks at the bank. The company has its board of directors who have specific roles at the bank. The board of directors is many, but some of the members are as follows. Paul Donofrio is the chief financial officer at the Bank of America. Donofrio has the responsibility of the overall financial management of the bank and therefore ensures that risks are mitigated through financial planning, balance sheet management, and another role that help in protecting the company’s resources. Geoffrey Greener is the chief risk officer at the bank. He has the responsibility of overseeing the bank's corporate governance as well as the strategy for global risk management and compliance.

Christine Katziff acts as the corporate general auditor of Bank of America. Katziff leads an international team of audit as well as credit review professionals who have the role of performing independent reviews of the bank's internal controls and credit standards to ensure that the make recommendation regarding the company’s risk framework and its business strategies. David Leitch acts as the Global General Counsel of the Bank and is, therefore, responsible for overseeing the bank's legal functions as well as its association with regulatory and law implementation authorities all over the world (Corporation., 2007).

Bank of America’s executive committee

Brian Moynihan is the chief executive officer at the company. He is also the company’s president and CEO. He has the responsibility of the consumer and small business banking, corporate and investment banking as well as wealth management. He is a lawyer as well as a businessman, and this makes him qualified for his position he has also served as a board member of other large organizations. Additionally, Moynihan held many banking positions before he becomes the president of the consumer and small business banking at the bank.

Paul Donofrio is the company's CFO and also serves as the chief financial officer at the Bank of America. Donofrio has the role of overall financial management of the bank and consequently guarantees that risks are mitigated through financial planning, balance sheet management, and another role that help in protecting the company’s resources. Mr. Donofrio helped as Head of Global Transaction Services at Bank of America Corporation since January 2012 to April 2015. He has worked for this bank for a long time and therefore has the experience and knowledge needed for this position.

Sarbanes-Oxley Act and other legislation

The SOX act has had a great impact on the Bank of America. Banks are under many regulatory oversight and statuses and with the introduction of SOX Bank of America and others continue to experience a great deal of harm. The SOX is duplicative of the requirements of the FDICIA, and the Bank of America has been requesting that some provisions under the SOX be eased to ensure that the regulatory burden is removed (Ambler, 2006).

Under the Securities and Exchange Act of 1934, section 302 requires the principal executive officer as well as the principal financial officer of the bank to take in certifications in annual and quarterly reports filed by the bank.

Asset-liability management

Walter Muller is the company’s chief investment officer at the bank and also handles asset-liability management at Bank of America. There is a need for liquidity planning to mitigate against liquidity risk. Interest rates projections help in mitigating interest rates risks. Currency risks can be mitigated by insuring against risks by taking an insurance cover. The company ensures that the risk of funding of capital projects is mitigated through the use of risk managers who help in advising on the best ventures. Planning for profit and growth can be a source of many risks but can be mitigated by proper management of resources.

Credit risks faced by Bank of America

Bank of America is a retail banking company that faces credit risks. Credit risks can be explained as the uncertainty that a counterparty will meet their financial obligations. Bank of America faces different forms of credit risks since there are different types of counterparties as well as obligations. The bank faces the risks of default whereby there is a high probability of the risk occurring. There is a likelihood that over the life of the obligation or in other specified period the counterparty will default (Ambler, 2006).

Bank of America also faces credit exposure that is associated with credit risks. Credit exposure explains how large the outstanding obligation will be when the counterparty defaults. The recovery rate is another issue in credit risk. Recovery rate is the fraction of the obligation that can be recovered in case of a bankruptcy proceeding or any other forms of settlement.

Credit risks associated with individuals versus credit risks associated with institutions

Institutional credit is different from individual credit risk since it is associated with a lower loss frequency and a higher severity. Further, institutional credit risk is affected by general economic conditions as well as by borrower-specific events. The credit risk associated with individuals is lower in magnitude and also its severity is not as serious as that one where an institution is a counterparty.

Retail banking services that Bank of America provides to individuals

Retail banking is the delivery of customer-oriented services to individual consumers. Bank of America is a retail bank, and it offers various kinds of services to individuals including, checking accounts, traveler's checks, ATM cards, debit cards, credit cards, savings accounts, mortgages, home equity, education loans, retirement schemes, children saving schemes and many other services.

Retail banking services that Bank of America provides to institutions

Bank of America also offers retail banking services to various institutions. Institutions use this bank to save money in various saving accounts. Further, the bank gives a massive amount of loans to institutions to be used for many purposes such as investing, making payments and other uses. Institutions also use the bank to deposit salaries of their employees, and this serves a critical part for the employer to pay workers. Institutions use the bank so that it can finance its projects such as mortgages.

Bank of America offers transaction accounts to institutions so that they can carry out their activities their transactions in a smooth manner. The company also receives money on behalf of the company in the form of deposits that are brought by customers. `

Bank assessment of credit risks

Bank of America assesses its credit risks by ensuring that it sets out the facts as they are to ensure that it determines customers who are likely to default. The customers that are most concerned with the costs of products are less likely to complete paying their obligations to the company. The bank also runs its credit report, and this helps in assessing customers such that those that do not want to fill it are seen to be those that have a high probability of meeting their financial obligation (Corporation., 2007).

Bank of America has an effective plan for managing and mitigating credit risks. The bank employs data visualization capabilities as well as business intelligence tools that get significant information into the hands of those who require it when they require it. This strategy helps this bank to reduce and manage credit risks that could cause harm to the company.

The company also has a way of testing stress-handling capabilities of individuals to ascertain whether they will be in a condition to repay what they owe the bank will be repaid in full. In case the company finds that an individual cannot handle stress well then it has a way of knowing that the customer has a high credit risk.

References Ambler, D. E. (2006). Sarbanes-Oxley Act: Planning & compliance. New York: Aspen. Corporation., D. &. (2007). Financial risk management. New Delhi: Tata McGraw-Hill. Fight, A. (2014). Understanding international bank risk. Chichester, West Sussex, England: John Wiley & Sons. Information Resources Management Association. (2015). Banking, finance, and accounting: Concepts, methodologies, tools, and applications. James, M. J. (2012). The story of Bank of America: Biography of a bank. Washington, D.C: Beard Books.