Bank of America: Finance Economics Report on Risk Assessment

This finance economics report provides a detailed analysis of Bank of America's risk management strategies. It begins with an introduction to the company and its financial services, followed by a discussion of the company's existing risks, including strategic, credit, market, and liquidity risks. The report then examines various risk transfer methods, such as hedging, insurance, and diversification, evaluating their strengths and weaknesses. It also explores how the company addresses economic situations like inflation and unemployment using financial instruments like options, swaps, and futures contracts. The report recommends that the company should review its financial position and asset management to mitigate risks, and concludes with a discussion of upcoming predictable risks. The report references the company's annual reports and other relevant sources to support its findings. The report is a comprehensive overview of the risk management practices within the Bank of America corporation.

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Finance Economics
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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Company’s Existing Risk............................................................................................................2
Strength and Weakness of Risk Transfer Methods......................................................................3
Economic Situations....................................................................................................................4
Risk Transfer Method..................................................................................................................4
Upcoming Predictable Risks........................................................................................................5
Conclusion.......................................................................................................................................5
References........................................................................................................................................6

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Introduction
The Bank of America Corporation is an American Multinational Corporation having it’s
services in the investment bank and other various kinds of financial services in the Charlotte,
North California with Central Banks in New York City, London, Hong Kong and Toronto. The
risk analysis will be performed for the bank reflecting the ways in which, company deploys in
managing and hedging the business or financial risk the company possess. Risk transfer method
and hedging strategies in order to remove the volatility in the financial statement of the company
is analysed (Stulz, 2015).
Discussion
Company’s Existing Risk
Risk management is an integral part of the operations of the company whereby the
company deploys various risk management tools for safeguarding the financial assets of the
company. The risk management is done by the company with the help of the risk management
policy of the company as articulated by the Risk Appetite Statement of the company and the
same is well guided by the Enterprise Risk Committee (ERC). The key risks faced by the
company in the last five-years is particularly as follows:
 Strategic Risks: Strategic Business risk can be faced with risk resulting from incorrect
assumptions including the various factors, ineffective business execution or failure in
responding to various regulatory, macro-economic or competitive environment under
which the operations of the company is based. There have been situations in the case of
merger and acquisitions and identification of the fair value of the assets where these
changes have been found.

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 Credit Risk: Credit risk arises from the inability or failure in repayments of loans from
the borrowers end. The bank have faced credit risk in the form of default in the
repayment of loans by the borrowers of the company and necessary provisions were
made in the financial statement of the company in contrast to the same.
 Market Risk: Change in the market conditions and value of the fair value assets or
instruments may significantly affect the overall value of the assets affecting the financial
position of the company. Changes in the currency rates and level of interest rate in the
economy has significantly affected the fair value of the financial assets, which were
reported in the other comprehensive income statement of the company.
 Liquidity Risk: Liquidity risk shows the inability of the company in meeting the current
liability of the company. The company has maintained liquidity in the form of higher
current asset in contrast to the current liabilities of the company.
Strength and Weakness of Risk Transfer Methods
Hedging: Hedging using financial instruments shows the steps taken by the company in
offsetting the adverse price movement for the financial assets of the company. The key strength
of the hedging can be it protects unwanted losses arising from the underlying assets. The key
weakness of the hedging can be it does not fully protect the financial losses arising rather it
protects us from the high fall or rise in the price of an asset limiting the profitability arising from
the asset (Our Corporate Risk Management: Leading to Responsible Growth, 2017).
Insuring: Protection from accidental losses like theft, fire and data breach is the key strength of
insurance risk transfer methods. The key weakness of this method is the high cost involved in the
same (About.bankofamerica.com, 2015).

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Diversifying: Diversifying is the process of classification and distribution of the investment into
various asset class in order to hedge the risk of investment or the concentration risk involved in
the same and it has been the key strength of the risk tool. The key weakness of this is that not
always diversification on a risk return benefit can provide sound return and risk management to
the management (Bank of America Culture - Integrity & Risk Management, 2019).
Economic Situations
Economic situation like high inflation, high unemployment rate and unexpected financial
risk can be well tackled with the help of the financial derivative instruments like options, swaps,
future contract and forward contract. The company should deploy these financial instruments in
order to hedge or protect the financial assets of the company. High inflation, unemployment and
interest rate can be well tackled with the help of the derivative instrument, which will financially
protect the company from these losses (The Global Risk team at Bank of America, 2019).
Risk Transfer Method
The risk transfer method, which the company can be done for managing the risk of the
company, can be done in accordance with the risk management policy of the company whereby
the management reviews the risk taken by the company in the form of associated financial
instruments. Swaps and forward contract in order to manage the currency risk associated with
company has been the key source for managing the risk of the company on an overall basis. It is
recommended that the management of the company should review the financial position of the
company and the asset of the company so that the risks arising from the same can be well tackled
by the management of the company (Annual Report, 2018)..

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Upcoming Predictable Risks
Risks in the field of credit risk, liquidity risk and market risk are the common risk, which
may be faced by the bank if the risk management policy of the company is not adequate in
managing the assets of the company. Rise in the level of inflation, interest rate and policies
followed by the government may significantly affect the profitability of the company. Thus, it is
essential that the company deploy various risk management tools in order to protect and hedge
the same (Bessis, 2015).
Conclusion
Risk management tools for the Bank of America was done thereby analysing and
assessing the various business condition that can significantly affect the financial position of the
company. The financial instruments that the company can apply in order to protect or mitigate
the risks were also taken into consideration for the purpose of analysis.

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References
About.bankofamerica.com. (2015). Business Standard Report. [online] Available at:
https://about.bankofamerica.com/assets/pdf/Bank-of-America-2015-Business-Standards-
Report.pdf [Accessed 27 Apr. 2019].
Annual Report 2018. (2018). Retrieved from
http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_BAC_2018.pdf
Bank of America Culture - Integrity & Risk Management. (2019). Retrieved from
https://about.bankofamerica.com/en-us/who-we-are/our-
culture.html#fbid=3HtxOg5Z4KK
Bank of America Culture - Integrity & Risk Management. (2019). About Bank of America.
Retrieved 27 April 2019, from https://about.bankofamerica.com/en-us/who-we-are/our-
culture.html#fbid=XSnCryJtWew
Bessis, J. (2015). Risk management in banking. John Wiley & Sons.
Our Corporate Risk Management: Leading to Responsible Growth. (2017). About Bank of
America. Retrieved 27 April 2019, from https://about.bankofamerica.com/en-us/what-
guides-us/risk-management.html#fbid=XSnCryJtWew
Stulz, R. M. (2015). Risk‐taking and risk management by banks. Journal of Applied Corporate
Finance, 27(1), 8-18.
The Global Risk team at Bank of America. (2019). Bank of America. Retrieved 27 April 2019,
from https://campus.bankofamerica.com/teams/global_ris