Answer & Explanation:Please see attach file before starting For this phase of the course project, you will conduct additional research for the bank you chose as the subject of your project. Write the next section of your risk management plan in which you discuss individual versus commercial lending practices, risk measurement techniques, and benefits of transfer credit risk.In this paper, please address the following questions:How would you describe the individual and commercial lending practices at the bank?How would you measure credit risk at the bank? Be sure to discuss techniques for measuring individual credit products and commercial credit products.How would the bank benefit from transfer of credit risk?What changes would you recommend in the bank’s lending practices?1-2 pages
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Running head: BANKING CREDIT RISK
Bank Credit Risks
Talesha McRae
Rasmussen College
Author Note
This paper is being submitted on September 16, 2016, for Melissa Bunch Applied
B415/RMI4020 Section 06 Risk Management.
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BANKING CREDIT RISK
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Retail Banking Credit Risk
Credit risk is a type of risk that an individual or institutional borrower will default either
in part or full in loan repayments. The retail banking units of Wells Fargo offer several types of
credit which include home development loans, household re-development loans, insurance,
credit card, car financing, and personal finance loans among others. These various financial
services expose the bank to credit default risk and concentration risk. The array of products
offered to individuals usually exposes a retail bank to credit default risk, which arises when the
borrower may unlikely fulfill its full loan obligation or the repayment default has exceeded
ninety days after the due date. Institutions that borrow from a retail bank and fails to pay may, in
addition to credit default risk, expose it to concentration risk (Wu & Olson, 2010). This risk,
which may be single or group, usually results in losses that may liquidate the bank
Well Fargo retail banking services for individuals include checking and saving accounts
with cash deposits, debit and prepaid cards, credit cards, online banking, transfers, mobile
banking, overdraft services, online bill payment services, and global remittances services among
others. It offers working capital financing, investment banking, treasury management,
institutional services, and corporate trust services among others. An application by either an
individual and institutional customer for credit is assessed for by using five parameters namely
credit history, capacity, collateral, capital, and conditions (Minton, Stulz & Williamson, 2009).
The bank’s risk management plan includes methods for mitigating risks that may arise from
failure by borrowers to fulfill their obligation to the bank. One of such methods is the use of
credit constraints, which places restriction of certain category of debtors. Also, loan pricing and
portfolio diversification are other methods used by the bank to mitigate credit risks.
BANKING CREDIT RISK
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References
Minton, B. A., Stulz, R., & Williamson, R. (2009). How much do banks use credit derivatives to
hedge loans? Journal of Financial Services Research, 35(1), 1-31.
Wu, D., & Olson, D. L. (2010). Enterprise risk management: coping with model risk in a large
bank. Journal of the Operational Research Society, 61(2), 179-190.
Running head: BUSINESS RISKS
Introduction
Every investor should guard against risks. There are risks that are within the control
of the investor or business and those that arise from the business’s external environment
which the business has no control against (Sadgrove, 2000). Risk takes place when the actual
returns differ from what the investor expects. It has a direct correlation with returns. This
means that the higher the risk, the higher the return from an investment.
Riskless investments do not give a higher opportunity to earn. Risk is normally
calculated from the history of returns using standard deviation formula. A higher risk will be
depicted by a high standard deviation. A low standard deviation will present a good venture
with high investor confidence due to low risk. Basically, risk looks at how the standard price
swings high or low compared to the actual price. A highly risky investment is less profitable
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BUSINESS RISKS
due to the fear of many investors to put their stake in such investments. A risk assessment
helps in the management of the risks.
Peoples risks in Manufacturing Company
Manufacturing risks result due to failed internal processes. Where the procedures and
systems in manufacturing operations have broken down this contributes to great
inefficiencies that puts the manufacturing company is exposed to increased losses. The
production managers may fail in their roles to coordinate and exercise good supervisory roles
to the team under them. This will result due to many human errors that will also result to
great losses and increased risks.
To guard against these risks in a manufacturing setting, manufacturers need to reduce
human interactions and automate the processes. These kinds of risks can be dealt with at
industry level. They are unsystematic risks that stem from the firms internal environment.
Also, the industry can resort to reworking its portfolio to bring a diversity of riskless
products. For the case of the risks affecting the whole industry, the company need to identify
its competitive advantage to be able to hedge against such risks to be able to survive while
making profitability.
Financial risks for a manufacturing company
Financial risks facing a manufacturing company may be classified into four major
categories namely, liquidity risks, credit risk, market risk and operations risks (Nersesian,
2004). Some of these risks are within the control of the company; hence the company has the
ability to manage them. Liquidity risk result due to company’s inability to manage its
operational cash flow. Where it is not easy to convert the assets into cash when there is an
urgent cash problem, the company operations may come to stand still if urgent intervention is
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BUSINESS RISKS
not made. This leads to financial risk. Also, if there is a general decline in the company’s
revenue during an operational year it will lead to liquidity problems leading to liquidity risks.
Operational risks results from a bad occurrence that may render the company unable
to meet its general operational needs. This results from ordinary business activities like losing
in a civil lawsuit or money fraud involving the company. It may also result from a bad
business model that fails to stand the market challenges.
Credit risk results from the company’s inability to recover credit from customers and
suppliers. The company may also fail to raise enough money to pay its suppliers which may
also lead to such risks. The company needs to maintain a good cash flow to be able to
overcome such challenges and remain in the market.
The current and emerging changes in the market also pose market problems. This
leads to market risks. Where a company is unable to counter the actions of the competitors in
marketing this will expose the company to market related risks.
Operational risks for a manufacturing company
These risks result from the business internal processes in the company’s internal
environment. Where there is failed management and supervision in a manufacturing
company, it leads to failure in the operations. This kind of risk can also be contributed by
failure in the vital internal systems and procedures. Operations deals with the means of how
an end product is produced in a company. Bad decisions also contribute to these risks. They
affect the ability of the firm to maintain consistent profitability trend and therefore the
consistent cash flows that is needed to maintain the operations.
Ways these risks might be avoided or mitigated
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BUSINESS RISKS
Risks can be mitigated or managed in a couple of ways that include risk avoidance,
risk acceptance, risks transfer and risk management (Sodhi and Tang, 2012). Risk avoidance
is the most ideal method of dealing with risks in a manufacturing company. It naturally
involves refusal to walk the path of risk making. Where a company is caught up in endless
risk making routines, it should avoid engaging in the activities to mitigate on such risks. A
good example is where a company dealing with manufacture of explosives has been caught in
recurring fire accident problems due to choosing a particular line of product that exposes it to
risk. Ideally, the company should seek to diversify and eventually drop the dangerous product
that predisposes it to more risks.
Through insuring against property risks, a manufacturing company is able to steer
clear from such risk as the burden rests with the insurer. The company agrees to pay money
for protection when the company is caught in such eventuality called premiums. A good
example is where a building catches fire. The insurer compensates the business upon
verifying that the risk was caused as a result of the fire accident. Errors and omissions
insurance protects against lawsuits involving the company that may result to loss of money.
The company chooses risk acceptance where the risk involved are temporal and will
help the company in realising the end product. This is usually done in anticipation of more
profitability resulting from the activities. A good example is pharmaceutical companies.
Where the risks are totally unavoidable, the company chooses to lessen the impacts of
the risk having accepted it. This is called risk mitigation. This happens where the company is
fully cognisant of events that contribute to the risk and its extent.
How manufacturing risks compare to risks faced in other industries
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BUSINESS RISKS
A manufacturing risk takes the same form with risks in other industries since it arises
from the normal business operations. It results from the company’s internal environment and
external processes and takes the form of systematic and unsystematic risks.
Conclusion
Risks are good when taken since they give people more opportunities in life. But
people should be ready to face any consequence that may occur when risks taken to earn
more fails. Also it is wise to have ways that helps in mitigating the risks while they occur.
This prevents people from been shocked by occurrences. Risks are great and people should
be encouraged to take risk in their companies, businesses and other places when opportunities
are realized.
References
Sadgrove, K. (2000). The complete guide to business risk management. Aldershot,
Hampshire, England: Gower.
Sodhi, M. & Tang, C. (2012). Managing Supply Chain Risk. Boston, MA: Springer US.
Nersesian, R. (2004). Corporate financial risk management. Westport, Conn.: Praeger.
Running Head: RISK MANAGEMENT PLAN
1
Wells Fargo has 15 members who make up the company’s Board of Directors. They
include John Baker, Suzanne Vautrinot, Elaine Chao, Susan Swenson, John Chen, John Stumpf,
Lloyd Dean, Stephen Sanger, Elizabeth Duke, James Quigley, Susan Engel, Federico Pena,
Enrique Hernandez, Cynthia Milligan and Donald James. These members are tasked with the
role of ensuring that the company achieves its objectives as stated in the vision. Their goals are
to ensure that the company continues with its impressive growth through diversity and inclusion
(Corsaro, 2010). The board members are aware that people are their greatest competitive
advantage, and as such, they always engage in values that serve the customers effectively. They
have to ensure responsibly and disciplined lending while growing revenue, managing risks and
managing expenses. The board members are also tasked with connecting stakeholders and
communities so as to attract new customers through deepening relationships.
RISK MANAGEMENT PLAN
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The members of the executive committee include: John Stumpf, the CEO, Timothy
Sloan, the President and Chief Operating Officer, John Shrewsberry, the Chief Financial Officer,
Hope Hardison, the Chief Administrative Officer, Kevin Rhein, the Chief Information Officer,
Michael Loughlin, the Chief Risk Officer, James Strother, the General Counsel and Richard
Levy, the Controller. What makes members of the executive committee qualified for their
positions is the years of experience that they bring to the company. Most of them have worked in
distinguished leadership positions for over 20 years, and that wealth of experience has been
instrumental in helping the company achieve its vision (Ferstl, 2011). They also have the
required academic qualifications from notable institutions, and this is another indication that they
have the competence and skills needed to ensure that the company competes favorably in the
financial sector that has become very competitive in recent decades.
Various legislation such as the Sarbanes-Oxley Act have greatly impacted how the Wells
Fargo Bank conducts its financial reporting. The goal of this Act was to broaden the scope and
increase the accuracy in which companies make their financial information public. For Wells
Faro, the particular aspects that were impacted include certification and disclosure. With regards
to certification, Companies like Wells Fargo are required to avail annual internal control reports
to show the processes and procedures that were used to collect, retain and even secure financial
information. Certain financial reports must also have executive sign-offs for them to be
considered valid (Yao, 2011). With regards to disclosure, Wells Fargo now has to disclose any
additional activities that might impact its financial statements. Even concerns that do not
specifically touch on finance such as pollution have to be included. These steps have to be
undertaken if corporate accounting is to be made more transparent. Through the Act, the top
RISK MANAGEMENT PLAN
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management of Wells Fargo is required to personally certify that the financial reports are
accurate. This ensures that the disclosure requirement s significantly strengthened.
The top management of Wells Fargo is tasked with handling asset liability management.
This is often achieved through strategic planning, as well as risk management (Corsaro, 2010).
The goal is to hedge and mitigate risks to ensure that assets are maximized as this ultimately
increases profitability. In order to mitigate various risks such as the interest rate risk, Wells
Fargo has to address the issue of mismatches when it comes to loans and deposits.one way in
which liquidity risk can be mitigated is though diversifying the investment portfolio.
References
Corsaro, S. (2010). On parallel asset-liability management in life insurance: a forward riskneutral approach. Journal of Economic Dynamics and Control, 390-426.
Ferstl, R. (2011). Asset-liability management under time-varying investment opportunities.
Journal of Banking & Finance, 182-198.
Yao, H.-x. (2011). A Simple Method for Solving Multiperiod Mean-Variance Asset-Liability
Management Problem. Journal of Accounting, 382-398.
Running head: WELLS FARGO BANKING RISKS
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Wells Fargo Banking Risks
People-Related Risks
People-related risks are usually challenging to quantify and manage. For Wells Fargo,
such risks involve managing over-exuberant managers’ behaviors, workplace bullying,
absenteeism, general health and safety, fraud, compliance and regulation, misconduct, change
resistance, among other misconducts (Ledwidge, 2007). To manage such risks, there is need for
suitable foresight, planning, proper governance, and engagement. The human resource can set
and enforce stringent policies through the staff handbook. This will create a tone of the
organization. Similarly, the managers must be proactive and engaging to ensure employees do
the right thing at the right time. Performance management and appraisals can also assist in
mitigating such risks.
Financial Risks
These risks are related to company’s finances and financial transactions. For Wells Fargo,
the huge bank loans can be at risk of payment default during bad economic times. Uncertainty
regarding investment rate of return, as well as finical losses are some of the financial risks the
bank takes daily (Lambin, 2007). Similarly, financial reporting, interest rates, asset losses,
changing financial market, foreign investment risks, goodwill and amortization, currency value,
stock market fluctuations, credit risks, commodity risks, and liquidity risks are a major concern
to the bank. Stringent internal and external audits can assist deal with such financial threats (Liu,
2014). The company can opt to use a strong financial system to stem determine any malpractices
or manipulations of financial records.
WELLS FARGO BANKING RISKS
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Operational Risks
It refers to the risks that result due to breakdown of internal processes, systems, people,
and procedures (Hopkin, 2014). They affect the bank’s ability to implement their strategic plans.
Each day the bank faces such risks as information system insecurity, privacy protection, fraud,
bank robberies, legal risks, environmental risks, and physical risks like infrastructure shutdown.
Some other operational risks include cost overrun, lack of operational controls, supply chain
issues, and poor operational capacity management (Sadgrove, 2016). The operational risks affect
the company’s reputation, shareholders’ value, and customer satisfaction while exposing the
business to great volatility. They are most revenue driven as opposed to being willingly incurred
(Ledwidge, 2007). They are also not diversifiable besides, they cannot be laid off since
processes, people, and systems are not perfect thus, the operational risks cannot be fully
eliminated. The company can however manage them to ensure risk levels are tolerable. Lastly;
with increasing globalization, the Internet, and social media use the management have sought to
implement suitable operational risk management (Liu, 2014). The company can conduct regular
assessment or audits through the internal audit department and external consultants to monitor
and mitigate all its operational risks.
WELLS FARGO BANKING RISKS
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References
Hopkin, P. (2014). Fundamentals of risk management: understanding, evaluating and
implementing effective risk management. Kogan Page Publishers.
Lambin, J. J., Chumpitaz, R., & Schuiling, I. (2007). Market-driven management: strategic and
operational marketing. Palgrave Macmillan.
Ledwidge, J. (2007). Corporate social responsibility: the risks and opportunities for HR:
Integrating human and social values into the strategic and operational fabric. Human
resource management international digest,15 (6), 27-30.
Liu, S., & Wang, L. (2014). Understanding the impact of risks on performance in internal and
outsourced information technology projects: The role of strategic
importance. International Journal of Project Management,32(8), 1494-1510.
Sadgrove, K. (2016). The complete guide to business risk management. Routledge.
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