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®The senior risk leaders of the Company’s three
operating segments: U.S. Card Services, International
Card & Global Commercial Services and Global
Network & Merchant Services.
As the most senior risk management entity, the ERMC
draws on its significant enterprise-wide risk expertise to
analyze risk comprehensively and determine acceptable
risk thresholds across the Company.
In order to enhance its enterprise-wide risk assessment,
the ERMC continues to upgrade risk management capa-
bilities in order to better measure, manage and transpar-
ently report on risk concentrations. The ERMC also
launches focused risk management initiatives to assess
the drivers of significant exposures.
Credit Risk Management Process
Credit risk is defined as the risk of loss from obligor or
counterparty default. Leadership for overall credit risk
management at the Company rests with the Chief Risk
Officer as Chairman of the ERMC. Credit risks in the
Company can be divided into two broad categories, each
with distinct risk management tools and metrics: con-
sumer credit risk and institutional credit risk.
Consumer Credit Risk
Consumer credit risk arises principally from the Com-
pany’s portfolio of cardmember receivables and loans.
Since such portfolio consists of millions of borrowers
across multiple geographies, occupations and social seg-
ments, its risk is substantially reduced through diversi-
fication. In addition, the Company benefits from the fact
that the credit profile of its cardmembers is better than
that of its many competitors, which is a combined result
of its underwriting and customer management policy
and of reward programs and other incentives embedded
in the structure of the Company’s products. The level of
consumer credit risk losses is more driven by general
economic and legal conditions than by borrower-
specific events.
Consumer credit risk is managed within a highly orga-
nized structure of Board-approved policies covering all
facets of credit extension, including approvals, authori-
zations, line management and fraud prevention. The
policies ensure consistent application of credit manage-
ment principles and standardized reporting of asset
quality and loss recognition metrics across domestic and
international portfolios. Moreover, consumer credit risk
management is supported by sophisticated proprietary
scoring and decision-making models.
Credit underwriting decisions are made based on a
sophisticated evaluation of product economics and
customer behavior predictions. The Company has
developed unique decision logic for each customer
interaction, including prospect targeting, new accounts,
line assignment, line management, balance transfer,
cross sell and account management. Each decision has
benefited from sophisticated modeling capability that
uses the most up-to-date information on customers,
including extensive payment history, purchase data and
insights from proprietary data feeds from all three
credit bureaus.
In addition to the impact of improved risk management
processes, the Company’s overall consumer credit per-
formance has also benefited from the shifting mix of the
portfolio towards products that reward the customer for
spending. Rewards attract higher spending from pre-
mium customers, which in turn leads to lower credit
loss rates.
While consumer credit risk indicators have continued to
show steady progress, the Company’s objective of driv-
ing profitable growth may be accomplished by the
launch of new products or of existing products in new
markets, which may exhibit higher loss rates.
The asset quality of the consumer portfolio is discussed
in U.S. Card Services’ Results of Operations section.
Institutional Credit Risk
Institutional credit risk arises within the Company’s cor-
porate card, large establishment services and network
services businesses. Unlike consumer credit risk, insti-
tutional credit risk is characterized by a lower loss
frequency but higher severity that, although affected by
general economic conditions, is generally linked to
more borrower-specific events. The Company’s senior
risk officers recognize that the absence of large losses in
any given year or over several years is not representative
of the risk of an institutional portfolio, given the infre-
quency of loss events in such a portfolio.
In 2005, the ERMC executed a major project to upgrade
risk management practices relating to institutional
credit risk exposures. This project delivered a set of
guidelines and escalation procedures for scrutinizing
institutional exposures based on the size and risk of
Company exposures. The ERMC enhanced its infra-
structure for gathering, classifying, quantifying and dis-
tributing its institutional credit exposure data so as to
embed it in all decision-making throughout the Company. Financial Review
AXP / AR.2005
[43 ]