Bank of America

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Texas State Technical College, Brown *

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303

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Finance

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Apr 3, 2024

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docx

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Spring 2022 Bank of America Market Risk Management Analysis Intro To Risk Management 2022 DESCRIPTION Bank of America (NYSE: BAC) is one of the biggest financial institutions in the United States. Bank of America also known as BOA to may has had a meteoric rise since its establishment in 1956. They have come along way that as of 2022 they have over $1.5 trillion assets under management and current revenue of over $85 billion dollars. With over 200,000 employees and more than 4,300 branches all over the U.S they are held to a higher standard than most institutions and must be able to manage their risk effectively if they want to continue to excel even more and not slow down. Bank of America as well as other financial institutions has been no stranger to scandals where one really questions the ethicalness of bankers and financial service companies alike. For instance, in 2000 they agreed to pay $35 million dollars to settle a class action suit alleging that it had charged excessive fees to trust account beneficiaries. In addition, they also had to pay $69 million and $460 million for dealing with corporate criminals Enron and WorldCom respectively. However, one of the biggest scandals that they have been caught in has been when they had to pay $16.5 billion to the justice department for financial fraud leading up to and during the financial crisis. This settlement being that they were involved in the packaging, marketing, sale, arrangement, structuring and issuance of RBMS, Collaterized Debt Obligations (CDOS), and the bank’s practices concerning the underwriting and origination of mortgage loans. In the Picture above you can see how expensive the financial crisis was for Bank of America. Many of the deals that Bank of America goes through are too complicated for the average consumer and would have wonder if they are even real and how would they even manage them in the first place. Managing Risk Bank of America is nowhere close to being a favorable institution to the American consumer 1

due to mistrust in the financial system but one thing that they do well is managing risk. In their 10-k they have a section strictly devoted to risk and there able to manage it soundly in order to serve their customers and deliver for their shareholders. As we have learned in class and in real life if risk is not managed well it can result in financial loss, in some extreme cases bankruptcy such as Lehman Brothers. Bank of America has seven key types of risk that they face are strategic , credit , market , liquidity , compliance , operational , and reputational . The risks that we have been going over in class and that I will further expand later on in this report are interest rate and market risk Management The Risk Framework describes delegations of authority whereby the Board and its committees may delegate authority to management-level committees or executive officers. The figure below shows the relationship among the board, board committees, and management comittees that have the majority of risk oversight in the bank. At the top you have the Board of directors and board committees who are in charge of maintaining an effective Risk Framework and making sure the bank has safe practices. One of the committees here that caught my attention was the audit committee which I have personally heard where I work at. The audit committee is usually in charge of overseeing the performance and independence of the public accounting firm that is performing the audit functions so for instance they would be in charge of seeing that an accounting firm such as EY is performing their job well and keeping integrity with compliance, of legal and regulatory requirements. Enterprise Risk Committee The enterprise risk committee is primarily responsible for the Risk Framework and key risks that Bank of America faces as well as their overall risk appetite. After approving the Risk Framework and Risk Appetite Statement it recommends them to the board for approval. The ERC also oversees the responsibilities of senior managements for the identification, measurement, monitoring, and control of key risks the bank faces. Other Board Committees/Management Committees Bank of America has either committee such as Corporate Governance, ESG, Sustainability, and Compensation and Human Capital Committee as well. The sustainability and Human Capital Committee are particularly interesting to me as I can connect to them with real life events (great resignation, sustainable businesses). Lines of Defense In addition to their Board committees and Management Committees, Bank of America has ownership and accountability across three lines of defense: Front Line Units (FLUs), Independent Risk Management (IRM) and Corporate Audit. They are in charge of protecting Bank of America from external as well as internal risks. Front Line Units 2

Front Line units include the line of businesses as well as the Global Technology and Operations Group are responsible for identifying risk and being able to manage it. They are essentially the first line of defense. There are organizational units that include FLU activities and control function activities are, the Chief Financial Officer Group; Second, Environmental and Social Governance, Capital Deployment, and public policy; and third, the Chief Administrative Offer (CAO) Group. What has been more important as of recently is the Environmental and Social Governance Group as the public has shifted to see if companies are not only making profits but doing what is best for the planet and if they are functioning ethically. Independent Risk Management The second line of defense would be Independent Risk Management. IRM establishes written enterprise policies and procedures that include concentration risk limits, where appropriate. These policies outline how risks are identified, measured, monitored, and controlled. Corporate Audit Corporate Audit reports directly to the audit committee and the board, Corporate Audit provides independent assessment and validation through testing of key process and controls across the corporation. They in periodically test and examine credit processes. To go further into this, all public companies have an internal audit function, and what they do is they set controls for all aspects of the corporation from operations to investments. So, for instance one control could be that internal audit sets a control for their override commissions. A simple control for this would me that a member of management signs off on override commissions on a timely basis. Another example could be that accounts payable pays their vendors within a reasonable amount of time. Controls such as this one ensures that the bank is running in a way that prevents another scandal such as Enrons. Market Risk Definition As per the financial statement the definition of market risk for Bank of America is “ Market risk is the risk that changes in market conditions may adversely impact the value of assets or liabilities, or otherwise negatively impact earnings.” As learned in class the impact of the value of assets or liabilities is particularly important as it can cause a bank to go under. This risk is primarily present in withing their global markets segment. In the event that there is stress in the market, these risks could have a material impact on the banks results. The tools that Bank of America uses in order to measure and mitigate potential losses are Value- at-Risk (VaR) and Stress testing. Periods of extreme market stress influence the reliability of these tools to varying degrees. Measure: Value-at-Risk(VaR) One of the two market risk measurement tools that Bank of America uses is Value-at-Risk which per the firm is defined as: “ VaR is a common statistic used to measure market risk as it allows the aggregation of market risk factors, including the effects of portfolio diversification” Without a doubt Value at risk is one of the most popular statistics in measuring risk as you can see it within the financial statements of other banks as well such as J.P Morgan. 3

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