Wells Fargo 2012 Annual Report Download - page 116

Risk Factors (continued)
another provider, possibly at a higher cost than the coverage we
would replace. We may be responsible for some or all of the
incremental cost of the new coverage for certain loans depending
on the terms of our servicing agreement with the investor and
other circumstances, although we do not have an additional risk
of repurchase loss associated with claim amounts for loans sold
to third-party investors. Similarly, some of the mortgage loans
we hold for investment or for sale carry mortgage insurance. If a
mortgage insurer is unable to meet its credit obligations with
respect to an insured loan, we might incur higher credit losses if
replacement coverage is not obtained. For example, in October
2011, PMI Mortgage Insurance Co. (PMI), one of our providers of
mortgage insurance, was seized by its regulator. We previously
utilized PMI to provide mortgage insurance on certain loans
originated and held in our portfolio and on loans originated and
sold to third-party investors. We also hold a small amount of
residential MBS, which are backed by mortgages with a limited
amount of insurance provided by PMI. PMI has announced that
it will pay 50% of insurance claim amounts in cash with the rest
deferred. Although we do not expect PMI’s situation to have a
material adverse effect on our financial results because of the
limited amount of loans and securities held in our portfolios with
PMI insurance support, we cannot be certain that any such
future events involving one of our other mortgage insurance
company providers will not materially adversely affect our
mortgage business and/or financial results. We also have
investments in municipal bonds that are guaranteed against loss
by bond insurers. The value of these bonds and the payment of
principal and interest on them may be negatively affected by
financial difficulties or credit downgrades experienced by the
bond insurers.
For more information, refer to the “Earnings Performance –
Balance Sheet Analysis – Securities Available for Sale” and “Risk
Management – Credit Risk Management– Liability for Mortgage
Loan Repurchase Losses” sections in this Report.
OPERATIONAL AND LEGAL RISK
A failure in or breach of our operational or security
systems or infrastructure, or those of our third party
vendors and other service providers, including as a
result of cyber attacks, could disrupt our businesses,
result in the disclosure or misuse of confidential or
proprietary information, damage our reputation,
increase our costs and cause losses. As a large financial
institution that serves over 70 million customers through over
9,000 stores, 12,000 ATMs, the Internet and other distribution
channels across the U.S. and internationally, we depend on our
ability to process, record and monitor a large number of
customer transactions on a continuous basis. As our customer
base and locations have expanded throughout the U.S. and
internationally, and as customer, public, legislative and
regulatory expectations regarding operational and information
security have increased, our operational systems and
infrastructure must continue to be safeguarded and monitored
for potential failures, disruptions and breakdowns. Our business,
financial, accounting, data processing systems or other operating
systems and facilities may stop operating properly or become
disabled or damaged as a result of a number of factors including
events that are wholly or partially beyond our control. For
example, there could be sudden increases in customer
transaction volume; electrical or telecommunications outages;
degradation or loss of public internet domain; natural disasters
such as earthquakes, tornados, and hurricanes; disease
pandemics; events arising from local or larger scale political or
social matters, including terrorist acts; and, as described below,
cyber attacks. Although we have business continuity plans and
other safeguards in place, our business operations may be
adversely affected by significant and widespread disruption to
our physical infrastructure or operating systems that support our
businesses and customers.
Information security risks for large financial institutions such
as Wells Fargo have generally increased in recent years in part
because of the proliferation of new technologies, the use of the
Internet and telecommunications technologies to conduct
financial transactions, and the increased sophistication and
activities of organized crime, hackers, terrorists, activists, and
other external parties, including foreign state-sponsored parties.
Those parties also may attempt to fraudulently induce
employees, customers, or other users of our systems to disclose
confidential information in order to gain access to our data or
that of our customers. As noted above, our operations rely on the
secure processing, transmission and storage of confidential
information in our computer systems and networks. Our
banking, brokerage, investment advisory, and capital markets
businesses rely on our digital technologies, computer and email
systems, software, and networks to conduct their operations. In
addition, to access our products and services, our customers may
use personal smartphones, tablet PC’s, and other mobile devices
that are beyond our control systems. Although we believe we
have robust information security procedures and controls, our
technologies, systems, networks, and our customers’ devices may
become the target of cyber attacks or information security
breaches that could result in the unauthorized release, gathering,
monitoring, misuse, loss or destruction of Wells Fargo’s or our
customers’ confidential, proprietary and other information, or
otherwise disrupt Wells Fargo’s or its customers’ or other third
parties’ business operations.
Third parties with which we do business or that facilitate our
business activities, including exchanges, clearing houses,
financial intermediaries or vendors that provide services or
security solutions for our operations, could also be sources of
operational and information security risk to us, including from
breakdowns or failures of their own systems or capacity
constraints.
To date we have not experienced any material losses relating
to cyber attacks or other information security breaches, but there
can be no assurance that we will not suffer such losses in the
future. Our risk and exposure to these matters remains
heightened because of, among other things, the evolving nature
of these threats, the prominent size and scale of Wells Fargo and
its role in the financial services industry, our plans to continue to
implement our Internet banking and mobile banking channel
strategies and develop additional remote connectivity solutions
to serve our customers when and how they want to be served, our
expanded geographic footprint and international presence, the
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