3 Risk taxonomy and risk analysis of BAC and WFC 31 Risk taxonomy Risk taxonomy

3 risk taxonomy and risk analysis of bac and wfc 31

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company to timely identify the changing internal and external environment. 3. Risk taxonomy and risk analysis of BAC and WFC 3.1 Risk taxonomy Risk taxonomy can be described as a common language of risk that is tailored to the business practice of the organization that can be applied across all activities within in an organization. According to the 2018 10-K report of BAC, strategic risk, financial risk, compliance risk, operational risk and reputation risk are listed in it, and the financial risk elements are classified as liquidity risk, credit risk and market risk. While WFC mainly exposed to seven categories
8 of risks, they are operational risk, compliance risk, strategic risk, conduct risk, model risk, reputation risk and credit risk. 3.2 Comparison of two companies Both BAC and WFC are showing similar risks which was outlined in their 2018 10-K annual reports, they are strategic risk, operational risk, compliance risk and reputation risk. Strategic risk stems from incorrect assumptions about external or internal factors and the Board has oversight responsibility for strategic plan in both companies. Operational risk is inherent in both companies’ activities, but the main operational risk is information security which includes cybersecurity in BAC. BAC’s online banking is a leader in online financial services, and its online banking business has gained worldwide recognition. In the reputation risk type, risks that resulting from negative perceptions of stakeholders are classified in both companies. In the compliance risk type, both companies are facing risks that resulting from non-compliance with applicable laws, regulations, rules and other regulatory requirements. However, conduct risk is mentioned in the 2018 10-K report of WFC and it is a sub-category of compliance risk. In June of 2018, Wells Fargo Advisors of WFC settles US Securities and Exchange Commission (SEC) charges for improper sales of complex financial products. In addition, model risk is listed in the 2018 10-K report of WFC, the work of the WFC Model Risk Department is to ensure the income of the bank's cash flow, because the primary issue of bank risk management is asset and liability. One is through the data modelling for credit risk assessment, and the other is the bank operation process risk. Under financial risk, two companies demonstrate great differences. For BAC, liquidity risk, credit risk and market risk are described in the 2018 10-K report, credit risk and market risk are the most important risk, in the 2018 10-K report of WFC, only credit risk is mentioned. The difference in the ranking of these risk is mainly because the two companies have different operational and regulatory strategies. BAC spends a lot of money on reducing the reputation risk, which may damage the interests of shareholders. In addition, the supervision of decision-making is not perfect.

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