Bank of America 2006 Annual Report Download - page 77

For reporting purposes, we allocate the allowance for credit losses across products. However, the allowance is available to absorb any credit losses
without restriction. Table 27 presents our allocation by product type.
Table 27 Allocation of the Allowance for Credit Losses by Product Type
December 31
2006 2005
(Dollars in millions) Amount Percent Amount Percent
Allowance for loan and lease losses
Residential mortgage $ 248 2.8% $ 277 3.4%
Credit card – domestic 3,176 35.2 3,301 41.0
Credit card – foreign 336 3.7 ––
Home equity lines 133 1.5 136 1.7
Direct/Indirect consumer 1,200 13.3 421 5.2
Other consumer 467 5.2 380 4.8
Total consumer 5,560 61.7 4,515 56.1
Commercial – domestic 2,162 24.0 2,100 26.1
Commercial real estate 588 6.5 609 7.6
Commercial lease financing 217 2.4 232 2.9
Commercial – foreign 489 5.4 589 7.3
Total commercial
(1)
3,456 38.3 3,530 43.9
Allowance for loan and lease losses 9,016 100.0% 8,045 100.0%
Reserve for unfunded lending commitments 397 395
Total $9,413 $8,440
(1) Includes allowance for loan and lease losses of commercial impaired loans of $43 million and $55 million at December 31, 2006 and 2005.
Market Risk Management
Market risk is the risk that values of assets and liabilities or revenues will
be adversely affected by changes in market conditions such as market
movements. This risk is inherent in the financial instruments associated
with our operations and/or activities including loans, deposits, securities,
short-term borrowings, long-term debt, trading account assets and
liabilities, and derivatives. Market-sensitive assets and liabilities are gen-
erated through loans and deposits associated with our traditional banking
business, customer and proprietary trading operations, ALM process,
credit risk mitigation activities and mortgage banking activities.
Our traditional banking loan and deposit products are nontrading
positions and are reported at amortized cost for assets or the amount
owed for liabilities (historical cost). The accounting rules require a histor-
ical cost view of traditional banking assets and liabilities. However, these
positions are still subject to changes in economic value based on varying
market conditions, primarily changes in the levels of interest rates. The
risk of adverse changes in the economic value of our nontrading positions
is managed through our ALM activities.
Trading positions are reported at estimated market value with
changes reflected in income. Trading positions are subject to various risk
factors, which include exposures to interest rates and foreign exchange
rates, as well as equity, mortgage, commodity and issuer risk factors. We
seek to mitigate these risk exposures by using techniques that encom-
pass a variety of financial instruments in both the cash and derivatives
markets. The following discusses the key risk components along with
respective risk mitigation techniques.
Interest Rate Risk
Interest rate risk represents exposures to instruments whose values vary
with the level or volatility of interest rates. These instruments include, but
are not limited to, loans, debt securities, certain trading-related assets
and liabilities, deposits, borrowings and derivative instruments. Hedging
instruments used to mitigate these risks include related derivatives such
as options, futures, forwards and swaps.
Foreign Exchange Risk
Foreign exchange risk represents exposures to changes in the values of
current holdings and future cash flows denominated in other currencies.
The types of instruments exposed to this risk include investments in for-
eign subsidiaries, foreign currency-denominated loans, foreign currency-
denominated securities, future cash flows in foreign currencies arising
from foreign exchange transactions, foreign-currency denominated debt
and various foreign exchange derivative instruments whose values fluc-
tuate with changes in the level or volatility of currency exchange rates or
foreign interest rates. Hedging instruments used to mitigate this risk
include foreign exchange options, currency swaps, futures, forwards and
deposits.
Mortgage Risk
Mortgage risk represents exposures to changes in the value of mortgage-
related instruments. The values of these instruments are sensitive to
prepayment rates, mortgage rates, default, other interest rates and inter-
est rate volatility. Our exposure to these instruments takes several forms.
First, we trade and engage in market-making activities in a variety of mort-
gage securities including whole loans, pass-through certificates, commer-
cial mortgages, and collateralized mortgage obligations. Second, we
originate a variety of mortgage-backed securities which involves the accu-
mulation of mortgage-related loans in anticipation of eventual securitiza-
tion. Third, we may hold positions in mortgage securities and residential
mortgage loans as part of the ALM portfolio. Fourth, we create MSRs as
part of our mortgage activities. See Notes 1 and 8 of the Consolidated
Financial Statements for additional information on MSRs. Hedging instru-
ments used to mitigate this risk include options, futures, forwards, swaps,
swaptions and securities.
Bank of America 2006 75