GE 2008 Annual Report Download - page 26

management’s discussion and analsis
24 ge 2008 annual report
Þ Market risk is the potential loss in value of investment and other
asset and liability portfolios, including financial instruments
and residual values of leased assets. This risk is caused by
changes in market variables, such as interest and currency
exchange rates and equity and commodity prices. We are
exposed to market risk in the normal course of our business
operations as a result of our ongoing investing and funding
activities. Additional information can be found in the Financial
Resources and Liquidity section and in Notes 6, 9, 12, 14, 28
and 29.
Þ Government and regulatory risk is the risk that the government
or regulatory authorities will implement new laws or rules,
amend existing laws or rules, or interpret or enforce them in
ways that would cause us to have to change our business
models or practices. We manage these risks through the
GECS Board, our Policy Compliance Review Board and our
Corporate Risk Committee.
Other risks include natural disasters, availability of necessary
materials, guarantees of product performance and business
interruption. These types of risks are often insurable, and success
in managing these risks is ultimately determined by the balance
between the level of risk retained or assumed and the cost of
transferring risk to others.
Our risk management approach has the following major tenets:
a broad spread of risk based on managed exposure limits; senior,
secured commercial financings; and a hold to maturity model with
transactions underwritten to our “on-book” standards.
The GECC financing portfolios comprise approximately 70%
commercial and 30% consumer risk activities, with 53% of the
portfolio outside the U.S. Exposure to developing markets is 11%
of the portfolio and is primarily through our Eastern European
banking operations and Mexican commercial financing activities —
where we have operated for over 10 years — and various minority-
owned joint ventures.
The commercial portfolio has a maximum single industry
concentration of 6%, excluding the commercial aircraft financing
and the commercial real estate businesses, which are diversified
separately within their respective portfolios. 67% of all commercial
exposures are less than $100 million to any one customer, while
55% are less than $50 million. Our commercial aircraft financing
business owns 1,494 aircraft — 56% are narrow body planes and
predominantly newer, high-demand models, while only 15% are
smaller regional jets and older Boeing 737 classic aircraft. The
average age of the fleet is 7 years and our customers include over
230 airlines located in 70 countries. Leased collateral represents
asset types we have over 20 years experience managing.
The GECS Board of Directors oversees the risk management
process, and approves all significant acquisitions and dispositions
as well as significant borrowings and investments. All participants
in the risk management process must comply with approval limits
established by the GECS Board.
The GECS Chief Risk Officer is responsible, with the Corporate
Risk Function, for establishing standards for the measurement,
reporting and limiting of risk; for managing and evaluating risk
managers; for approving risk management policies; and for
reviewing major risk exposures and concentrations across the
organization. The GECS Corporate Risk Function analyzes certain
business risks and assesses them in relation to aggregate risk
appetite and approval limits set by the GECS Board of Directors.
Threshold responsibility for identifying, quantifying and miti-
gating risks is assigned to our individual businesses. We employ
proprietary analytic models to allocate capital to our financing
activities, to identify the primary sources of risk and to measure
the amount of risk we will take for each product line. This approach
allows us to develop early signals that monitor changes in risk
affecting portfolio performance and actively manage the portfolio.
Other corporate functions such as Controllership, Financial
Planning and Analysis, Treasury, Legal and our Corporate Audit
Staff support business-level risk management. Businesses that, for
example, hedge financial risk with derivative financial instruments
must do so using our centrally managed Treasury function, pro-
viding assurance that the business strategy complies with our
corporate policies and achieves economies of scale. We review
risks periodically with business-level risk managers, senior man-
agement and our Board of Directors.
Dedicated risk professionals across the businesses include
underwriters, portfolio managers, collectors, environmental and
engineering specialists, and specialized asset managers who
evaluate leased asset residuals and remarket off-lease equipment.
The senior risk officers have, on average, over 25 years of
experience.
We manage a variety of risks including liquidity, credit, market
and government and regulatory risks.
Þ Liquidity risk is the risk of being unable to accommodate lia-
bility maturities, fund asset growth and meet contractual
obligations through access to funding at reasonable market
rates. Additional information about our liquidity and how we
manage this risk can be found in the Financial Resources and
Liquidity section and in Notes 18 and 29.
Þ Credit risk is the risk of financial loss arising from a customer
or counterparty failure to meet its contractual obligations. We
face credit risk in our investing, lending and leasing activities
and derivative financial instruments activities (see the Financial
Resources and Liquidity and Critical Accounting Estimates
sections and Notes 1, 9, 12, 13, 29 and 31).