Fannie Mae 2010 Annual Report Download - page 152

earnings or cash flows. In regards to financial securities or instruments, credit risk is the risk of not
receiving principal, interest or any other financial obligation on a timely basis, for any reason. Credit risk
exists primarily in our mortgage credit book of business and derivatives portfolio.
•Market Risk. Market risk is the exposure generated by adverse changes in the value of financial
instruments caused by a change in market prices or interest rates. Two significant market risks we face
and actively manage are interest rate risk and liquidity risk. Interest rate risk is the risk of changes in our
long-term earnings or in the value of our net assets due to fluctuations in interest rates. Liquidity risk is
our potential inability to meet our funding obligations in a timely manner.
•Operational Risk. Operational risk is the loss resulting from inadequate or failed internal processes,
people, systems, or from external events.
We are also subject to a number of other risks that could adversely impact our business, financial condition,
earnings and cash flow, including legal and reputational risks that may arise due to a failure to comply with
laws, regulations or ethical standards and codes of conduct applicable to our business activities and functions.
Another risk that can impact our financial condition, earnings and cash flow is model risk, which is defined as
the potential for model errors to adversely affect the company. See “Risk Factors” for a discussion of the risks
associated with our reliance on models.
Our risk management framework and governance structure are intended to provide comprehensive controls and
ongoing management of the major risks inherent in our business activities. Our ability to identify, assess,
mitigate and control, and report and monitor risk is crucial to our safety and soundness.
•Risk Identification. Risk identification is the process of finding, recognizing and describing risk. The
identification of risk facilitates effective risk management by achieving awareness of the sources, impact
and magnitude of risk.
•Risk Assessment. We assess risk using a variety of methodologies, such as calculation of potential losses
from loans and stress tests relating to interest rate sensitivity. When we assess risk we look at metrics
such as frequency, severity, concentration, correlation, volatility and loss. Information obtained from these
assessments is reviewed on a regular basis to ensure that our risk assumptions are reasonable and reflect
our current positions.
•Risk Mitigation & Control. We proactively develop appropriate mitigation strategies to prevent
excessive risk exposure, address risks that exceed established tolerances, and address risks that create
unanticipated business impact. Mitigation strategies and controls can be in the form of reduction,
transference, acceptance or avoidance of the identified risk. We also manage risk through four control
elements that are designed to work in conjunction with each other: (1) risk policies; (2) risk limits;
(3) delegations of authority; and (4) risk committees.
•Risk Reporting & Monitoring. Our business units actively monitor emerging and identified risks that
are taken when executing our strategies. Risks and concerns are reported to the appropriate level of
management to ensure that the necessary action is taken to mitigate the risk.
Enterprise Risk Governance
Our enterprise risk management structure is designed to balance a strong corporate risk management
philosophy, appetite and culture with a well-defined independent risk management function. Our objective is to
ensure that people and processes are organized in a way to promote a cross-functional approach to risk
management and that controls are in place to better manage our risks and comply with legal and regulatory
requirements.
Our enterprise risk governance structure consists of the Board of Directors, executive leadership, including the
Chief Risk Officer, the Enterprise Risk Management division, designated officers responsible for managing our
financial risks, business unit chief risk officers, and risk management committees. This structure is designed to
encourage a culture of accountability within the divisions and promote effective risk management throughout
the company.
147