American Express 2007 Annual Report Download - page 52

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
•฀The Chief Credit Officers representing all operating
segments of the Company; and
•฀The enterprise-wide leaders of compliance, controllership,
and information security.
As the most senior risk management entity, the ERMC draws
on its significant 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 capabilities
that help the Company make better business and investment
decisions as well as strengthen measuring, managing and
transparent reporting of risk. The ERMC also launches focused
risk management initiatives to assess the sources of significant
exposures.
Under the ERMC leadership, committees governing each
risk type are established. These committees are responsible
for translating the ERMC guidance and enterprise-wide risk
policies into policies and procedures for their corresponding risk
types, managing and monitoring those risks, and strengthening
risk capabilities.
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.
Credit risks in the Company can be divided into two broad
categories, each with distinct risk management tools and
metrics: consumer credit risk and institutional credit risk.
CONSUMER CREDIT RISK
Consumer credit risk arises principally from the Company’s
portfolio of consumer and small business charge cards, credit
cards, lines of credit, and loans. Since such portfolio consists of
millions of borrowers across multiple geographies, occupations,
and social segments, its risk is substantially reduced through
diversification. In addition, the Company benefits from the
fact that the typical credit profile of its cardmembers is better
than that of its many competitors, which is a combined result
of brand positioning, underwriting, and customer management
policies, premium customer servicing, and product reward
features. The level of consumer credit risk losses is more driven
by general economic and legal conditions than by borrower-
specific events.
General principles and the overall framework for managing
consumer credit risk across the Company are defined in the
Individual Credit Risk Policy approved by the ERMC. This
policy is further supported by a highly organized structure
of subordinate policies covering all facets of consumer credit
extension, including prospecting, approvals, authorizations, line
management, collections, and fraud prevention. These policies
ensure consistent application of credit management principles
and standardized reporting of asset quality and loss recognition.
Moreover, consumer credit risk management is supported by
sophisticated proprietary scoring and decision-making models.
Credit underwriting decisions are made based on
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, balance transfer, cross
sell, and account management. Each decision benefits from
sophisticated modeling capability that uses the most up-to-
date proprietary information on customers, including payment
history, purchase data, as well as insights from data feeds from
credit bureaus.
In addition to the impact of improved risk management
processes, the Company’s overall consumer credit performance
has also benefited from the shifting mix of the portfolio towards
products that reward the customer for spending. Rewards attract
higher spending from premium customers, which in turn leads
to lower credit loss rates.
However, the Company’s objective of driving profitable
growth may be accomplished by the launch of new products or
of existing products in new markets, which may exhibit higher
loss rates. Also, the consumer credit performance is impacted by
external factors, such as general economic conditions, changes
in legal environment, and competitive actions.
INSTITUTIONAL CREDIT RISK
Institutional credit risk arises principally within the Company’s
corporate card services, merchant services, network services,
and from the Company’s investment activities. Unlike consumer
credit risk, institutional credit risk is characterized by a lower
loss frequency but higher severity. It is affected both by general
economic conditions and by 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 necessarily
representative of the risk of institutional portfolios, given the
infrequency of loss events in such portfolios.
General principles and the overall framework for managing
institutional credit risk across the Company are defined in
the Institutional Credit Risk Policy approved by the ERMC.
The Institutional Risk Management Committee (IRMC) is
responsible for implementation and enforcement of this policy
and for providing guidance to the credit officers of each business
unit with substantial institutional credit risk exposures, who in
turn make investment decisions in core risk capabilities, ensure
proper implementation of the underwriting standards and
contractual rights of risk mitigation, monitor risk exposures,
and determine risk mitigation actions. The IRMC formally
reviews large institutional exposures to ensure compliance
with ERMC guidelines and procedures. At the same time, the
IRMC provides continuous guidance to business unit risk teams
to optimize risk-adjusted returns on capital. A company-wide
risk rating utility and a specialized airline risk group provide
independent risk assessment of institutional obligors.
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