Bank of America 2006 Annual Report Download - page 65

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The credit risk amounts take into consideration the effects of legally
enforceable master netting agreements and cash collateral. Our consumer
and commercial credit extension and review procedures take into account
funded and unfunded credit exposures. For additional information on
derivatives and credit extension commitments, see Notes 4 and 13 of the
Consolidated Financial Statements.
For credit risk purposes, we evaluate our consumer businesses on
both a held and managed basis (a non-GAAP measure). Managed basis
treats securitized loan receivables as if they were still on the balance
sheet. We evaluate credit performance on a managed basis as the receiv-
ables that have been securitized are subject to the same underwriting
standards and ongoing monitoring as the held loans. In addition to the
discussion of credit quality statistics of both held and managed loans
included in this section, refer to the Card Services discussion beginning on
page 46. For additional information on our managed portfolio and securiti-
zations, refer to Note 9 of the Consolidated Financial Statements.
We manage credit risk based on the risk profile of the borrower or
counterparty, repayment sources, the nature of underlying collateral, and
other support given current events, conditions and expectations. We
classify our portfolios as either consumer or commercial and monitor
credit risk separately as discussed below.
Consumer Portfolio Credit Risk Management
Credit risk management for the consumer portfolio begins with initial under-
writing and continues throughout a borrower’s credit cycle. Statistical
techniques in conjunction with experiential judgment are used in all
aspects of portfolio management including product pricing, risk appetite,
setting credit limits, operating processes and metrics to quantify and
balance risks and returns. In addition, credit decisions are statistically
based with tolerances set to decrease the percentage of approvals as the
risk profile increases. Statistical models are built using detailed behavioral
information from external sources such as credit bureaus and/or internal
historical experience. These models are a critical component of our con-
sumer credit risk management process and are used in the determination
of both new and existing credit decisions, portfolio management strategies
including authorizations and line management, collection practices and
strategies, determination of the allowance for credit losses, and economic
capital allocations for credit risk.
For information on our accounting policies regarding delinquencies,
nonperforming status and charge-offs for the consumer portfolio, see
Note 1 of the Consolidated Financial Statements.
Management of Consumer Credit Risk
Concentrations
Consumer credit risk exposure is managed geographically and through our
various product offerings with a goal that concentrations of credit exposure
do not result in undesirable levels of risk. We purchase credit protection
on certain portions of our portfolio that is designed to enhance our overall
risk management strategy. At December 31, 2006 and 2005, we had
mitigated a portion of our credit risk on approximately $131.0 billion and
$110.4 billion of consumer loans, including both residential mortgage and
indirect automotive loans, through the purchase of credit protection. Our
regulatory risk-weighted assets were reduced as a result of these trans-
actions because we transferred a portion of our credit risk to unaffiliated
parties. At December 31, 2006 and 2005, these transactions had the
cumulative effect of reducing our risk-weighted assets by $36.4 billion and
$30.6 billion, and resulted in increases of 30 bps and 28 bps in our Tier 1
Capital ratio at December 31, 2006 and 2005.
Consumer Credit Portfolio
Table 12 presents our held and managed consumer loans and leases and
related asset quality information for 2006 and 2005. Overall, consumer
credit quality remained sound in 2006 as performance was favorably
impacted by lower bankruptcy-related charge-offs.
Bank of America 2006
63