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bank_course_project_paper.docxRunning head: BANK RISK TYPES AND TRENDS 1
BANK RISK TYPES AND TRENDS 19
Bank Risk Types and Trends
Toni Stewart
Rasmussen College
Author Note
This paper is being submitted on August 21, 2016 for Professor Rudeen’s B415/RMI4020 Risk Management course.
Bank Risk Types and Trends
Introduction
The Bank of America has been in existence for quite some now having been launched in the year 1904 by Amadeo Giannini. The bank has its headquarters in Charlotte, North Carolina. Regarding assets, it is the second largest holding company in the United States. It is a multinational company where its services are delivered in numerous countries across the globe. The Bank of American has incorporated the latest technology in its operations with the primary aim of reaching more clients (Mason, 1997).
The company has integrated online banking which is one of the standard banking methods in recent times due to the ease of accessibility. The company has many products across its many branches. The common goods and services offered by the firm include corporate banking, finance and insurance, investment banking, private banking, consumer banking and credit card services. Thus, the Bank of America will be the basis of this project as it explores common aspects including risk management of the bank (Bernhardt, 2015).
As other business organizations, various challenges are involved in its operations; these problems in the banking sector are referred to as risks. Every organization has its share of risk in its operational or management and the success of any given investment firm depend on how well they can control these massive risks within their business environment. In this era where technology is on top of everything, risks in management and operation have become more pronounced.
Risk types
The Bank of America just like other banking company’s face many risks within their business environment and thus they are forced to develop better strategies to prevent these risks from becoming the organization's major hindrances to success. Thus, the Bank of America has put into consideration some important risks that can derail its development and achievement of its set mission and vision statement (Mason, 1997).
Strategic risks
These are common untapped opportunities and uncertainties that the business organization has identified and included its strategic plan and have a clear formulation plan on how the organization will execute them. Some of the common strategic risks that the organization has identified include the strategy-focused risk and technology risk. These are a common strategic risk that many business organizations tend to ignore because they do not believe that their preferences in the market can be affected by other factors in future (Bernhardt, 2015).
Operational risks
The organization encounters these risks on a regular basis during its operation. These are risks that employees are most liable to because errors are likely to occur, and it is tough to develop appropriate measures to counter operational error because either way, they will always happen in business organizations performance. The organization has been on the alert in ensuring that operational risks do not derail the company’s performance. Some of the most common business risks that the organization faces on a daily basis include marketing risks and fraudulent risks, which are common risks in business operations (Rothaermel, 2015).
Financial risks
Outside marketing forces profoundly influence the level at which a firm carries out its activities. When there is an unfavorable market condition, then the company may have a dip in revenues generated. Financial risks are one of the high-profile risks that are taken into account by many organizations because it influences directly on organizations profits. The most common types of financial risks that the organization encounters include liquidity risk and credit risks.
Compliance risks
Compliance risk happens when the organization's exposure to legal penalties and material loss when it fails to act by the industry laws and regulation. Thus as the name compliance suggests, it more concerned with the ability of the organization to comply with various legislation and regulation that make its operation lawful and legally binding. The most common compliance risk that the company is likely to encounter is the legal risks (Rothaermel, 2015).
Risk trends
The risks in banking sectors are heavily changing thus there is the need to monitor and develop favorable strategies that can help improve in risk management. Trends in risk management tend to vary over time because especially with the development of technology there is the need to consider risk management strategies to deal with developing new and future risks (Elgammal, 2016).
Risk mitigation
These are various strategies and plan that a given company adapts to reduce the impact of numerous risks within a business setting. The Bank of America has developed various risk mitigation policies that adequately address these risks (Sadgrove, 2016, p. 46).
Lending practices
The Bank of America has different credit policies that regulate its lending practices depending on the services delivered. The company has specific lending policies for a diverse group of clients for efficient service delivery.
Capitalization and solvency
Capitalization and solvency are more concerned with organizations debt about capital. Since the great recession, the Bank of America has developed important strategies that provide critical information regarding the position of the company regarding assets and liabilities to ensure smooth running of operations (Sadgrove, 2016).
References
Bernhardt, R. (2015). Bank of America v. Caulkett. Publications. Paper 745.
Retrieved from
http://digitalcommons.law.ggu.edu/cgi/viewcontent.cgi?article=1740&context=pubs
Elgammal, A., Turetken, O., van den Heuvel, W. J., & Papazoglou, M. (2016). Formalizing and
applying compliance patterns for business process compliance. Software & Systems Modeling, 15 (1), 119-146.
Mason, R. O., McKenney, J. L., & Copeland, D. G. (1997). Bank of America: The Crest and
Trough of Technological Leadership. MIS Quarterly, 21(3), 321-353. Retrieved from
http://eds.a.ebscohost.com.ezproxy.rasmussen.edu/eds/pdfviewer/pdfviewer?vid=2&sid=
84213193-51c0-41b0-b29e-3701616b3011%40sessionmgr4009&hid=4202
Rothaermel, F. T. (2015). Strategic management. McGraw-Hill.
Sadgrove, K. (2016). The complete guide to business risk management. Routledge. Retrieved from:
Banking Risks
The Bank of America undertakes routine risk management which enables the management to devise and execute the appropriate mitigation strategies promptly. People risks associated with the organization include threats of hackers who unpredictably attempt to infiltrate sensitive information and money to jeopardize customer trust. This can be mitigated by installing intrusion detection systems and firewalls to block, detect and deter unauthentic access to bank’s system. Another people risk is the misuse of office powers by certain top officials who tend to exploit, harass and overwork particular employees. This degrades the motivation of workers that might negatively affect their performance in future. Managers can mitigate this by dismissing and replacing such officials if they aren’t ready to change their behavior. Financial risk threatening the bank includes the bank’s liquidity which isn’t promising. It might not be able to adequately pay depositors or even offer loans (Perez, 2014). Furthermore, the bank might fail to have ample capital to sustain its daily activities.
This can only be mitigated by ensuring that liquidity is proactively managed and financial data frequently analyzed with utmost attentiveness. Operational risks include robberies which lead to loss of significantly large amounts of money that would make the bank incur high losses. Shareholders, investors, and customers might lose trust in the bank’s ability to keep their property safe. This can be mitigated by employing more tactical security guards who will efficiently detect suspicious individuals or activity and capture the culprits. White-collar fraud is another operational risk threatening Bank of America which involves embezzlement of funds and loan scams by top managers for selfish gains. This leads the bank to a significant loss of capital and investments. It can be mitigated by assessing the ethical conduct of all managers and employees so as to prune assiand fire those who have bad intentions of stealing money from the bank regardless of their respective level of professionalism and skillfulness (Huskic, 2015).
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References
Huskic, S. (2015). California foreclosed: Robert Somerton and the battle with Bank of America.
Retrieved from
http://www.occupy.com/article/california-foreclosed-robert-somerton-and-battle-bank-
america#sthash.00KD48K0.vj01Y5B1.dpbs
Perez, S. (2014). An investor’s guide to banking risks: Must-know: Liquidity risk – when
banks have too little cash. Retrieved from
http://marketrealist.com/2014/09/must-know-liquidity-risk-banks-little-cash/
Mitigating Bank Risks
Board of directors
The Bank of America’s board of directors works at offering an authoritative platform to monitor and ascertain that every activity and employee acts in conformance to the stipulated corporate governance instructive. Accountability and decision- making competence of the management and staff is jointly assessed to give clients an assurance of trust as well as enable the latter to know that all laws and regulations governing clients’ confidentiality are applied accordingly (Moynihan, 2016). The board of directors’ members include Brian Moynihan (Chief Executive officer and Chairman of the Board), Linda P. Hudson (The Cardea Group’s Chairlady and CEO), Jack O. Bovender, Jr. (Lead Independent Director), Sharon L. Allen (Deloitte LLP’s former Chairlady), Monica C. Lozano (US Hispanic Media Inc.’s former chairlady), Thomas J. May (Eversource Energy’s chairman), Susan S. Bies (Federal Reserve System’s former member of its board of governors), Lionel L. Nowell III (PepsiCo’s former treasurer), Frank P. Bramble (MBNA’s Inc. former executive officer), Michael D. White (DIRECTV’s former chairman and chief executive officer), Arnold W. Donald (Carnival Corporation’s president), Thomas D. Woods (Canadian Imperial Bank of Commerce’s former vice chairman), Pierre J. P. de Weck (Deutsche Bank’s former chairman) and R. David Yost (AmerisourceBergen Corporation’s former Chief Executive Officer) (investor.bankofamerica.com, 2016). The boards’ roles are essential to the bank in that they enable accurate financial analysis, make decisions and lead the bank in the right direction by formulating and enforcing the code of conduct (Corkery, 2015).
Executive management team
The CEO (Chief Executive Officer), president and chairperson of the board of directors of the Bank of America is Brian Thomas Moynihan. He is responsible for supporting small business banking, corporate banking, managing wealth and investment management. He has great experience in leadership roles as evidenced by his many jobs as chairman in supervisory boards such as that of Clearing House. He leads the Business Roundtable, Financial Services Forum among others. The CFO (Chief Financial Officer) of the bank is Paul Donofrio who is responsible for managing the overall financial matters of the bank. These include roles in financial planning, tax, corporate investment and accounting. He is qualified for this position since he has profound knowledge and expertise in handling financial management for many companies such as U.S. Navy (naval flight officer between years 1982 up to 1988) and UBS (1994-1999). He also has leadership skills developed by his previous jobs as head of Global Investment Banking, Transaction Banking as well as Media and Telecom Group (newsroom.bankofamerica.com, 2016)
Sarbanes-Oxley Act
The primary focus of this particular Act was to ascertain that public organizations can access highly uniform framework which monitors and protects them by offering a platform for effective corporate accountability. Consequently, the investors’ interests would be highly safeguarded since audit reports will be sufficiently disclosed to reflect more accuracy and provide in-depth information. The Bank of America’s financial reporting has been influenced by the Act’s Section 302 which obligates the financial and executive officers to oversee the inclusion of all certifications within the financial reports on a quarterly and yearly basis. Also, the certifying officers must exhaustively review the financial reports so as to make sure that there exist no omissions or misstatements (Falanga, 2006). Other legislation includes the bank’s internal control whose policies require that the financial reports be reflective of all the dispositions and transactions relating to all the bank’s assets (Lewis, 2008).
Asset Liability Management
Asset liability is the responsibility of the ALMRC (Asset Liability and Market Risk Committee) which is run under the command of the organization’s CFO (Paul Donofrio). Impacts emanating from all its constituent business ventures are realized and analyzed. Herein, all risks associated with mismatches that exist between liabilities and assets are evaluated proactively. Liquidity risks are mitigated by the Enterprise Risk Committee which devises ways with which the organization can meet contractual obligations. This committee also deals with the interest rate, funding projects and currency risks via conducting timely and highly accurate capital management. Growth and profitability risks are countered by carrying out a deep analysis of customer base, preferences, and organizational operations which enable proper identification of undesirable trends, products, and services that might hinder positive growth (Merrill Lynch, 2016).
.
References
Corkery, M. (2015). Victory for the chief and the board at bank of America over a dual role.
Retrieved from
http://www.nytimes.com/2015/09/23/business/dealbook/bank-of-america-shareholders-
allow-ceo-to-keep-chairmans-role.html?_r=1
Falanga, S. V. (2006). Sarbanes-Oxley impact on banks under teview. Retrieved from
http://www.metrocorpcounsel.com/articles/6974/sarbanes-oxley-impact-banks-under-
review
investor.bankofamerica.com (2016). Bank of America Investors Relations- Board of Directors.
Retrieved from http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-
govboard#fbid=MvZLuH8-veT
Lewis, K.D. (2008). United States Securities and Exchange Commission. Retrieved from
https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2009/emilbereczky012209-
14a8.pdf and
https://www.sec.gov/Archives/edgar/data/70858/000119312509041126/d10k.htm
Merrill Lynch. (2016). Managing risk at bank of america corporation. Retrieved from
orp.bankofamerica.com/documents/10157/970179/BAC_Managing_Risk_June_20.pdf
Moynihan, B.T. (2016). Corporate governance. Retrieved from
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-
govhighlights#fbid=MvZLuH8-veT
newsroom.bankofamerica.com (2016). Paul Donofrio, Chief Financial Officer, Bank of America.
Retrieved from http://newsroom.bankofamerica.com/paul-donofrio
Bank Credit Risks
Retail banking faces credit risks when the customers of the bank, as well as the counterparties that transact with the bank, fails to attain their financial obligations. For instance; they may fail to repay their loans resulting into the corporate bank incurring losses by failing to recover the money lent and the interest that the loan accrues. The bank will be forced to prematurely close the transaction and collateral held may be of less value (Pond, 2014).
The credit risks that are associated with the individuals occur when the customers of the banks or financial institutions fail to repay the credit products given to them such as credit cards, mortgage or loan (Hunseler, 2013).On the other hand, the credit risks that are related to institutions occurs when investment activities of a company such as corporate services, network services or merchant services result in losses. However, this loss is not severe compared to the individual credit risks
Retail banking provides several services to the individual customers, and these include facilitating the making of serving through depository services, offer loans, and other credit services (Pond, 2014). Some retail banking also offers insurance services as well as online banking services thus improving the accessibility of banking
Retail banking is also essential to the institution; it offers them merchant services such as check management as well as the managing of finances of the institution by giving them loans payroll services (Pond, 2014).
My bank assesses credit risk by setting up risk management plan to supervise the credit risks and employing sound practices that would enable it to counter the possible losses that may be caused; this is done through assessment of the quality of the asset or collateral used for the credit (Hunseler, 2013).
References
Hunseler, M. (2013). Credit portfolio management: A practitioner's guide to the active management of credit risks. Houndmills, Basingstoke: New York, NY.
Pond, K. (2014). Retail Banking. Global Professional Publishing; 3rd edition (2014-03-14)
(1656).
Bank Lending Practices
Risk management is the process where a bank or a business oriented firm identifies, assesses and develops critical strategies that are meant to manage risks (Jordao, 2010). It is intended to take control of an organization's capital and its earnings. The risks or threats may originate from various sources; it can be natural disasters, some uncertainties on financial matters or accidents. Risk management plan is the processes of identifying and controlling this particular threat so that they do not affect the company regarding financial matters or in other ways such controlling it to the firm's digital assets. This may include some corporate data and customer's individually distinguishable data and knowledgeable property.
Banks such the Bank of America, encounter risks regularly which are of different types that may have an adverse impact on their day-to-day businesses. Risk management in bank operations may include risk identification, measurement, and assessment. Therefore the objective of the bank is to reduce undesirable effects of risks on the finance and capital of a bank. It is an obligation of a bank to have a unit of specialists that are responsible for risk management and also provide necessary guidelines risk identification, measurement, and assessment, as well as measures for risk management.
Lending is to provide somebody with some money with the condition that it will be repaid within a specified period. Commercial lending is a debt-based financing arrangement between a bank and a financial institution. Usually, the loan can be for funding capital expenses and operational costs of the organization which it cannot be able to raise. The loans are provided by the banks for a short period because they are granted to various corporate bodies, usually to assist them in short-term financing needs. A company must be viable for the loan by providing necessary documents to the bank such as balance sheets to show the consistency of cash flow of the business. Banks will in return require monthly financial statements from the company through the duration of the loan.
Individual loans, on the other hand, are consumer loans that are provided for personal purposes such as medical and educational purposes. Repayment of the loan is usually in a fixed amount of installments over a fixed period. In the Bank of America which is a case study, the personal loans are insecure for the lender because of the risks that the lender has to handle and therefore as a result he or she will have to pay higher interest rates and additional fee charges on the loan.
Credit risk is defined as the possibility where an individual or an institution that a bank may fail to meet its compulsions in agreement with the terms and conditions of the loan (Coyle, 2000). It is termed to be the largest source of risk that is frequently encountered by banks. The banks should, therefore, use various techniques in measuring the credit risks such as risk-based pricing where banks need to price their products based on the risk associated with the debtor. The borrowers who have high risks will have to pay higher, and there are expenses used to mitigate the risk of unexpected losses. Another technique is portfolio evaluation where banks need to assess the credit risk inherent in the entire portfolio and also at the individual level. There is also benefits or credit risk transfer in that banks transfer credit risks to liberate capital for further loan intermediation (Basel Committee on Banking Supervision, 2005). Another advantage is diversification and a decrease in the expenses of raising external capital for credit intermediation. I, therefore, recommend that banks should not charge higher and unaffordable interest rates while lending loans.
In conclusion, risk management is the process where a bank or a business oriented firm identifies, assesses and develops relevant strategies that are meant to manage risks. Various institutions should have a unit for mitigating the risks. The commercial loans which are usually for businesses and individual loans that are for personal purposes may have effects on banks. Therefore the bank has some techniques of measuring the credit risks before giving out the loans as discussed above.
References
Basel Committee on Banking Supervision; (2005). The joint forum: credit risk transfer.
Retrieved from http://www.bis.org/publ/joint21.pdf
Coyle, B. (2000). Measuring credit risk. Chicago: Glendale Publishing Company; New York:
AMACOM.
Jordao, B. and Sousa, E. (2010). Risk management by the American society of insurance
management. New York: Nova Science Publishers.
