eTrade 2010 Annual Report Download - page 62

RISK MANAGEMENT
As a financial services company, we are exposed to risks in every component of our business. The
identification and management of existing and potential risks are the keys to effective risk management. Our risk
management framework, principles and practices support decision-making, improve the success rate for new
initiatives and strengthen the organization. Our goal is to balance risks and rewards through effective risk
management. Risks cannot be completely eliminated; however, we do believe risks can be identified and
managed within the Company’s risk tolerance.
Our businesses expose us to the following four major categories of risk that often overlap:
•Credit Risk—the risk of loss resulting from adverse changes in the ability or willingness of a borrower
or counterparty to meet the agreed-upon terms of their financial obligations.
•Liquidity Risk—the risk of loss resulting from the inability to meet current and future cash flow and
collateral needs.
•Interest Rate Risk—the risk of loss from adverse changes in interest rates, which could cause
fluctuations in our long-term earnings or in the value of the Company’s net assets.
•Operational Risk—the risk of loss resulting from fraud, inadequate controls or the failure of the
internal controls process, third party vendor issues, processing issues and external events.
We are also subject to other risks that could impact our business, financial condition, results of operations or
cash flows in future periods. See Part I-Item 1A. Risk Factors.
We manage risk through a governance structure involving the various boards, senior management and
several risk committees. We use management level risk committees to help ensure that business decisions are
executed within our desired risk profile. A variety of methodologies and measures are used to monitor, quantify,
assess and forecast risk. Measurement criteria, methodologies and calculations are reviewed periodically to
assure that risks are represented appropriately. Risks are managed and controlled under policies and related limits
that are approved by the Board of Directors and delegated to senior management.
The Finance and Risk Oversight Committee, which was established in the second quarter of 2008 and
consists of members of the Board of Directors, monitors the risk process and significant risks throughout the
Company. In addition to this committee, various enterprise risk committees and departments throughout the
Company aid in the identification and management of risks, including:
•Asset Liability Committee—The Asset Liability Committee (“ALCO”) has primary responsibility for
managing liquidity risk and interest rate risk and reviews balance sheet trends, market interest rate and
sensitivity analyses.
•Credit Risk Committee—The Credit Risk Committee monitors asset quality trends, evaluates market
conditions, determines the adequacy of the allowance for loan losses, establishes underwriting
standards, approves large credit exposures, approves large portfolio purchases and delegates credit
approval authority.
Various departments throughout the Company aid in the identification and management of risks. These
departments include internal audit, compliance, finance, legal, treasury, credit and enterprise risk management.
Risk reporting occurs at the business or operating units and is aggregated across the Company through the
enterprise risk management process.
Credit Risk Management
Our primary sources of credit risk are our loan and securities portfolios, where risk results from extending
credit to customers and purchasing securities, respectively. The degree of credit risk associated with our loans
and securities varies based on many factors including the size of the transaction, the credit characteristics of the
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