Risk Management at Wachovia Putting ERM into Practice

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Risk Management at Wachovia Putting ERM into
Practice

• NC State University
• Don Truslow, Chief Risk Officer
• September 22, 2006

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Agenda

• Wachovia Overview
• Risk Management Grounded in Vision and Values
• Key Risks Facing the Financial Industry
• Wachovias Approach to ERM
• Governance
• Process
• Technology
• People
• Challenges and Learnings

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Wachovia Overview Diversified Businesses
TTM Segment Earnings Key Business Lines (
millions) US Rank

• General Bank 4,270 (60)(Retail, small business
  and commercial banking)
• 3,100 branches, 5,100 ATMs 3
• Capital Management 673 (10)
• Retail Brokerage 10,500 registered reps 3
• Mutual Fund 93 billion AUM 21
• Wealth Management (Private Banking) 236 (3)
• 39,000 clients, 68 billion client AUM 4
• Commercial Insurance Brokerage 10
• Corporate and Investment Bank 1,900 (27)
• 3,800 corporate clients (2,400 institutional
  clients)
• Capital Markets Issuance Top 10
• Preferreds 4
• Loan syndications 4
• Investment grade 8
• Cash Management 3

TTM earnings refer to the trailing 12 months
between 7/1/05 and 6/30/06 and exclude merger
related and restructuring costs. Retail
Brokerage ranking based on client assets of 704
billion. Mutual Fund ranking based on FRC as of
6/30/06. Wealth Management ranking based on
total private banking assets under management of
278 billion. Source Barrons. League table
rankings based on lead deal dollar volumes for
year to date 2006 through June 30, 2006.
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Wachovia Overview

• No. 3 Retail Bank
• No. 3 Retail
  Brokerage Firm
• Top 10 in U.S.
  Capital Markets
  
  Issuance
• No. 4 Wealth
  Manager
• Top 10 Mortgage
  Bank

Based on deposit market share. Source SNL
Financial Based on retail brokerage client
assets of 706 billion. Based on private
client assets of 298 billion. Source 2005
Barons Wealth Manager Survey Source Inside
Mortgage Finance, July 2006.
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Wachovia Vision Values
Vision To be the best, most trusted and admired
financial services company

• Aspirations
• Consistent top quartile financial performance and
  returns
• Industry leading customer service
• Leading employer of choice high employee
  engagement
• Leading corporate citizen serve communities in
  a meaningful way

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What is Risk?

• Risk is the uncertainty around an expected
  outcome.
• Uncertainty affected by controllable and
  uncontrollable factors
• The higher the level of uncertainty, the higher
  the level of risk
• Risk is present in nearly every aspect of life
• In business, risk/uncertainty/volatility
  ultimately affect a firms ability to crate value
• Risk Management encompasses the processes,
  disciplines, and actions intended to reduce
  (minimize) or offset (mitigate) the uncertainty
  around an expected outcome.

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Lower Volatility Results in a Higher P/E
10-year earnings growth volatility
WB
Average
Top Quartile BKX
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What is Our Target Risk Environment?

• Informed, measured and disciplined risk takers
• Maintain a relatively low level of volatility
  around earnings growth aspiration over time

EPS
TIME
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Where does Risk Management fit?
Drives
Less
Equals
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Categorization of Risk

• Three Broad Groupings
• Credit Failure to be repaid monies owed to
  Wachovia
• Market Decline in the net value of Wachovias
  assets less its liabilities due to price/interest
  rate changes in the market
• Operational Loss arising from the failure of
  processes, systems, people or due to external
  events

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What is Operational Risk?
Credit Risk
Operational Risk Components

• Loss Management
• Technology
• Human Capital
• Business Process
• Vendor
• Financial

• Corporate Real Estate
• Fiduciary
• Legal
• Compliance
• Business Continuity Planning
• Change Management

Operational Risk
Market Risk
Business Risk
Operational risk is the risk of loss resulting
from inadequate or failed internal processes,
people, and systems, or from external events.
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What is the Fastest Growing Area of Risk At
Wachovia?
Operational Risk
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Enterprise Risk Management Approach
Governance
Process
Board of Directors Management Committees Risk
Organization
Risk Assessment Measurement Capital
Allocation Mgmt Reporting
Technology
People
Tools that expedite our goals
Culture Education Awareness Certification
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Governance

• Risk Committee of the Board
• Senior Risk Committee
• Functional Risk Committees
• Risk Management Organization

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Risk Management Governance Structure
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Risk Management Organization
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Process

• Developed new enterprise-wide
  operational risk and business
  continuity processes
• Streamlined underwriting processes
  for efficiency and effectiveness
• Reviewing compliance processes
• Better metrics and reporting

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Technology

• Risk Policy Online
• New Data Center
• AML Monitoring
• Operational Risk Management Suite
• Risk Information Strategy

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People

• Risk Culture
• Communication and Awareness
• Training and Certification
• Risk Tied to Reward Incentive Planning

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Top Risks

• Anti-Money Laundering Compliance
• Safeguarding Sensitive Customer Data
• Information Security/Access Control
• Implementation Risk
• Vendor Risk (includes outsourcing/off-shoring)
• Concentration Risk Credit
• Strategic/Business Risk
• Event Risk (markets suddenly become illiquid)
• New Product Complexity

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Evolving Risk Culture

• Risk Management is a strong part of the companys
  DNA
• Considered by all functions at all levels of the
  organization
• Factored into management decision-making
• Risk Management keeps our company on track to
  achieving the vision
• Avoid major pitfalls
• Risk Management is a value added business partner
• Help business lines leverage strategic
  opportunities
• Ensure appropriate levels of risk and return

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Challenges to ERM

• Disparate risk types
• Measurement
• Clearly defining the risk appetite
• Competing priorities
• Balancing regulatory view and business view
• Ensuring both infrastructure investment and
  business investment
• Internal governance overlap

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Summary

• Effective Risk Management competitive advantage
• Risk Management is grounded in the companys
  vision and core values
• Critical to define the companys desired outcome
  and risk appetite
• Oversight and independence are key to living
  within risk appetite
• Governance, Process, Technology all play a key
  role but People/Culture are Critical

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Q A
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