Bank of America 2011 Annual Report Download - page 116

114 Bank of America 2011
the business and enterprise control function levels to address
operational risk in revenue producing and non-revenue producing
units. A sound internal governance structure enhances the
effectiveness of the Corporation’s Operational Risk Management
Program and is accomplished at the enterprise level through formal
oversight by the Board, the CRO and a variety of management
committees and risk oversight groups aligned to the Corporation’s
overall risk governance framework and practices. Of these, the
Operational Risk Committee (ORC) oversees and approves the
Corporation’s policies and processes for sound operational risk
management. The ORC also serves as an escalation point for
critical operational risk matters within the Corporation. The ORC
reports operational risk activities to the Enterprise Risk Committee
of the Board.
Within the Global Risk Management organization, the
Corporate Operational Risk team develops and guides the
strategies, policies, practices, controls and monitoring tools for
assessing and managing operational risks across the organization
and reports results to the businesses, enterprise control functions,
senior management, governance committees and the Board.
The business and enterprise control functions are responsible
for all the risks within the business line, including operational risks.
In addition to enterprise risk management tools such as loss
reporting, scenario analysis and RCSAs, operational risk
executives, working in conjunction with senior business
executives, have developed key tools to help identify, measure,
mitigate and monitor risk in each business and enterprise control
function. Examples of these include personnel management
practices, data reconciliation processes, fraud management units,
transaction processing monitoring and analysis, business recovery
planning and new product introduction processes. The business
and enterprise control functions are also responsible for
consistently implementing and monitoring adherence to corporate
practices.
Business and enterprise control function management uses
the enterprise risk and control self-assessment process to identify
and evaluate the status of risk and control issues, including
mitigation plans, as appropriate. The goal of this process is to
assess changing market and business conditions, to evaluate key
risks impacting each business and enterprise control function and
assess the controls in place to mitigate the risks. The risk and
control self-assessment process is documented at periodic
intervals. Key operational risk indicators for these risks have been
developed and are used to help identify trends and issues on an
enterprise, business and enterprise control function level.
Independent review and challenge to the Corporation’s overall
operational risk management framework is performed by the
Corporate Operational Risk Validation Team.
The enterprise control functions participate in the operational
risk management process in two ways. First, these organizations
manage risk in their functional department. Second, they provide
specialized risk management services (e.g., information
management, vendor management) within their area of expertise
to the enterprise and the businesses and other enterprise control
functions they support. These groups also work with business and
risk executives to develop and guide appropriate strategies,
policies, practices, controls and monitoring tools for each business
and enterprise control function relative to these programs.
Additionally, where appropriate, insurance policies are
purchased to mitigate the impact of operational losses when and
if they occur. These insurance policies are explicitly incorporated
in the structural features of operational risk evaluation. As
insurance recoveries, especially given recent market events, are
subject to legal and financial uncertainty, the inclusion of these
insurance policies is subject to reductions in their expected
mitigating benefits.
Complex Accounting Estimates
Our significant accounting principles, as described in Note 1 –
Summary of Significant Accounting Principles to the Consolidated
Financial Statements are essential in understanding the
Management’s Discussion and Analysis of Financial Condition and
Results of Operations. Many of our significant accounting
principles require complex judgments to estimate the values of
assets and liabilities. We have procedures and processes in place
to facilitate making these judgments.
The more judgmental estimates are summarized in the following
discussion. We have identified and described the development of
the variables most important in the estimation processes that,
with the exception of accrued taxes, involve mathematical models
to derive the estimates. In many cases, there are numerous
alternative judgments that could be used in the process of
determining the inputs to the models. Where alternatives exist,
we have used the factors that we believe represent the most
reasonable value in developing the inputs. Actual performance
that differs from our estimates of the key variables could impact
our results of operations. Separate from the possible future impact
to our results of operations from input and model variables, the
value of our lending portfolio and market-sensitive assets and
liabilities may change subsequent to the balance sheet date, often
significantly, due to the nature and magnitude of future credit and
market conditions. Such credit and market conditions may change
quickly and in unforeseen ways and the resulting volatility could
have a significant, negative effect on future operating results.
These fluctuations would not be indicative of deficiencies in our
models or inputs.
Allowance for Credit Losses
The allowance for credit losses, which includes the allowance for
loan and lease losses and the reserve for unfunded lending
commitments, represents management’s estimate of probable
losses inherent in the Corporation’s loan portfolio excluding those
loans accounted for under the fair value option. Changes to the
allowance for credit losses are reported in the Consolidated
Statement of Income in the provision for credit losses. Our process
for determining the allowance for credit losses is discussed in
Note 1 – Summary of Significant Accounting Principles to the
Consolidated Financial Statements. We evaluate our allowance at
the portfolio segment level and our portfolio segments are home
loans, credit card and other consumer, and commercial. Due to
the variability in the drivers of the assumptions used in this
process, estimates of the portfolio’s inherent risks and overall
collectability change with changes in the economy, individual
industries, countries, and borrowers’ or counterparties’ ability and
willingness to repay their obligations. The degree to which any
particular assumption affects the allowance for credit losses
depends on the severity of the change and its relationship to the
other assumptions.
Key judgments used in determining the allowance for credit
losses include risk ratings for pools of commercial loans and
leases, market and collateral values and discount rates for
individually evaluated loans, product type classifications for
consumer and commercial loans and leases, loss rates used for