Bank of America 2015 Annual Report Download - page 65

Bank of America 2015 63
Credit Risk Management
Credit quality remained stable during 2015 driven by lower U.S.
unemployment and improving home prices as well as our proactive
credit risk management activities positively impacting our credit
portfolio as nonperforming loans and delinquencies continued to
improve. For additional information, see Executive Summary –
2015 Economic and Business Environment on page 20.
Credit risk is the risk of loss arising from the inability or failure
of a borrower or counterparty to meet its obligations. Credit risk
can also arise from operational failures that result in an erroneous
advance, commitment or investment of funds. We define the credit
exposure to a borrower or counterparty as the loss potential arising
from all product classifications including loans and leases, deposit
overdrafts, derivatives, assets held-for-sale and unfunded lending
commitments which include loan commitments, letters of credit
and financial guarantees. Derivative positions are recorded at fair
value and assets held-for-sale are recorded at either fair value or
the lower of cost or fair value. Certain loans and unfunded
commitments are accounted for under the fair value option. Credit
risk for categories of assets carried at fair value is not accounted
for as part of the allowance for credit losses but as part of the fair
value adjustments recorded in earnings. For derivative positions,
our credit risk is measured as the net cost in the event the
counterparties with contracts in which we are in a gain position
fail to perform under the terms of those contracts. We use the
current fair value to represent credit exposure without giving
consideration to future mark-to-market changes. 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 encompass
funded and unfunded credit exposures. For more information on
derivatives and credit extension commitments, see Note 2 –
Derivatives and Note 12 – Commitments and Contingencies to 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 in each as discussed below.
We refine our underwriting and credit risk management
practices as well as credit standards to meet the changing
economic environment. To mitigate losses and enhance customer
support in our consumer businesses, we have in place collection
programs and loan modification and customer assistance
infrastructures. We utilize a number of actions to mitigate losses
in the commercial businesses including increasing the frequency
and intensity of portfolio monitoring, hedging activity and our
practice of transferring management of deteriorating commercial
exposures to independent special asset officers as credits enter
criticized categories.
We have non-U.S. exposure largely in Europe and Asia Pacific.
For more information on our exposures and related risks in non-
U.S. countries, see Non-U.S. Portfolio on page 84 and Item 1A.
Risk Factors of our 2015 Annual Report on Form 10-K.
Utilized energy exposure represents approximately two percent
of total loans and leases. For more information on our exposures
and related risks in the energy industry, see Commercial Portfolio
Credit Risk Management – Industry Concentrations on page 81
and Table 46.
For more information on our credit risk management activities,
see Consumer Portfolio Credit Risk Management on page 64,
Commercial Portfolio Credit Risk Management on page 75, Non-
U.S. Portfolio on page 84, Provision for Credit Losses on page 86
and Allowance for Credit Losses on page 86, Note 1 – Summary
of Significant Accounting Principles, Note 4 – Outstanding Loans
and Leases and Note 5 – Allowance for Credit Losses to the
Consolidated Financial Statements.