Risk Management Plan

Risk Management Plan

RISK MANAGEMENT PLAN 3

RiskManagement Plan

RiskManagement Plan

Riskmanagement underlines the identification, evaluation andprioritization of risks, as well as the economical and coordinatedapplication of resources so as to control, monitor and minimize thelikelihood and/or effect of unfortunate events or to optimize therealization of opportunities. As the largest financial servicescompany in the globe, the Bank of America retains its solvencythrough diversification of investments and the setting assign of arisk capital so as to ensure that its operations are not interferedwith in case one of the ventures are determined not to be profitablein the long-term (Berkowitz &amp O’Brien, 2002).

Riskcapital underlines the investment funds that are allocated by abusiness entity to speculative activity (Berkowitz &amp O’Brien,2002). In the case of the Bank of America, the risk capital comes inhandy in speculative activity, as well as financing diversificationespecially in instances where the investment is risky. Apart fromundertaking due diligence and determining the profit projections ofany project or investment, it is imperative that it puts in placesome form of insurance that would protect it from suffering anylosses in case the project does not work. Further, selecting an armthat would determine the solvency and likely profitability of anundertaking would be imperative.

Asat 1993, the Bank of America’s Risk and Capital Analysis Group wasgiven the task of coming up with and establishing a corporate-widesystem for allocating capital to all activities of the bank. Sincethat time, the system has offered quarterly reports pertaining toRAROC for all the 37 major business units of the bank. The bank usesRAROC in the comparison of the returns pertaining to varied projectsthat have different risk levels so as to choose the most appropriateone for a particular time.

References

Berkowitz,J &amp O’Brien, J (2002). “How Accurate Are Value-at-Risk Modelsat Commercial Banks?” Journal of Finance 57, no. 3 (June):1093-1111.