American Express 2005 Annual Report Download - page 44

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Risk Management
Introduction
Risk management is a key lever in driving profitable
growth at the Company. By creating transparent limits
on risk exposures, optimizing investment decision-
making and identifying unacceptable risks, risk man-
agement plays a fundamental role in the Company’s
efforts to create shareholder value.
In addition to business risk, the Company recognizes
three fundamental sources of risk:
®Credit Risk,
®Market Risk, and
®Operational Risk.
These risk types are interrelated and span the Company’s
business units and geographic locations. Given the
nature and scope of these risks, the Company believes
in centrally managing them at an enterprise level. Fur-
ther, management has adopted well-defined principles
regarding credit, market and operational risk to guide
the Company’s business strategy and achieve long-term
shareholder objectives. The Company views underwrit-
ing credit risk as a significant lever in driving profitable
growth. Market risk is hedged or managed within estab-
lished parameters to sustain such earnings growth,
while operational risk arising from the Company’s busi-
ness activities is carefully monitored to maintain it
within acceptable limits.
Principles
The implementation of the Company’s risk management
objectives is based on the following three principles:
®Independence of risk management oversight;
®Management of risk exposures through Board-
approved risk limits; and
®Ultimate business ownership for risk-return deci-
sion making.
The Company’s risk management leaders partner with
business unit managers in making risk-return decisions
by utilizing standardized risk metrics with predictable
outcomes. The measurement and reporting of these
risks are performed independently by risk management
leaders. However, business unit managers ultimately
remain accountable for the outcome of risk-return
decisions within these established limits.
Governance
Risk management governance at the Company begins
with Board oversight of risk management parameters.
The Board’s Audit Committee approves the Company’s
risk management objectives, as well as major risk limits,
policies and key process controls. Supporting the Board
in its oversight function is the Global Leadership Team
(GLT) and the Enterprise Risk Management Committee
(ERMC). In addition to risk-return decision-making, the
GLT works with the ERMC to increase awareness
throughout the Company of risk-return tradeoffs on a
daily basis. The ERMC leads the Company’s overall risk
management activities by measuring and monitoring
enterprise-wide risk, and establishing enterprise-wide
risk management policies and practices.
Daily risk management occurs at the business unit level
where the processes and infrastructure necessary to
measure and manage risk are integrated into business
unit goals. Business unit managers, in partnership with
independent risk management leaders, make decisions
regarding the assumption of risks that are within estab-
lished limits and confined to an individual business
unit. The Company has also developed a process that
provides increased scrutiny throughout the risk manage-
ment governance structure and requires higher levels
of approval for exposures above defined risk thresholds
or that may impact different business units.
The escalation process is designed so that the large major-
ity of transactions and initiatives can continue to be
accommodated within existing business unit risk man-
agement processes, while ensuring that risks with
enterprise-wide implications receive enhanced scrutiny.
Roles and Responsibilities
The ERMC is chaired by the Company’s Chief Risk
Officer. Given the key role of credit risk in the Company
business model, credit officers responsible for (i) card-
member credit risk management services, (ii) the
centralized functional responsibilities for worldwide
card fraud and information management, and (iii) bank-
ing services, all report directly to the Chief Risk Officer.
In addition, as the Chair of the ERMC, the Chief Risk
Officer is also responsible for managing and controlling
overall credit, market and operational risk exposures
throughout the Company.
In addition to the Chief Risk Officer, the ERMC is
composed of:
®The senior risk leaders responsible for enter-
prise-wide market and operational risk (including
Internal Audit);
®The enterprise-wide leaders of compliance, control-
lership and technologies; and
Financial Review
AXP / AR.2005
[42 ]