RISK MANAGEMENT APPROACH According to the Risk Management section of Wells Fargo’s 2011 Annual Report, to be successful they manage and control three major business risks: credit, asset/liability, and market risk. As for this paper, I’m only going to discuss about their credit and interest rate risk, which is managed under their asset/liability section. Wells Fargo has continued to invest in its risk infrastructure especially since it is a larger and more complex company than before it merged with Wachovia. Wells Fargo’s Senior Executive Vice President and Chief Risk Officer, Michael Loughlin states that they have three lines of defense for managing the risks:
“Our businesses own the risk, have their own risk personnel, and are the first line of defense. Corporate risk is the second line of defense. Internal audit is the third line of defense” (Loughlin PDF 6).
I have also read and analyzed Wachovia’s last Annual Report before the merger with Wells Fargo at the end of 2008. I believe the reason Wells Fargo is far more successful than Wachovia was is because while Wachovia believed their “proactive” risk management approach was a competitive advantage due to “greater customer satisfaction and enhanced reputation”, Wells Fargo believes that their competitive advantage comes from them taking risks only when they understand them (Wachovia Annual Report 37). In addition, Wells Fargo is very effective in managing and controlling their interest rate risk and credit risk.
INTEREST RATE RISK
Definition:
As discussed in class, Wells Fargo defines interest rate risk as the probability that rates will rise or fall, which can affect their earnings. They believe interest rate risk “potentially can have a significant earnings impact” (WFC Annual Report 78). There are four reasons that Wells Fargo stated as to why they are exposed to interest rate risk. They are: * If interest rates are falling and assets are repricing faster than