US Bank 2006 Annual Report Download - page 46

exposure to retail lease residual impairments to be relatively maintain a system of controls with the objective of
stable relative to a year ago. providing proper transaction authorization and execution,
At December 31, 2006, the commercial leasing proper system operations, safeguarding of assets from
portfolio had $636 million of residuals, compared with misuse or theft, and ensuring the reliability of financial and
$678 million at December 31, 2005. At year-end 2006, other data. Business managers ensure that the controls are
lease residuals related to trucks and other transportation appropriate and are implemented as designed.
equipment were 26.4 percent of the total residual portfolio. Each business line within the Company has designated
Railcars represented 18.6 percent of the aggregate portfolio, risk managers. These risk managers are responsible for,
while business and office equipment and aircraft were among other things, coordinating the completion of ongoing
18.3 percent and 13.5 percent, respectively. No other risk assessments and ensuring that operational risk
significant concentrations of more than 10 percent existed management is integrated into business decision-making
at December 31, 2006. In 2006, residual values in general activities. Business continuation and disaster recovery
remained stable or were favorable. The transportation planning is also critical to effectively manage operational
industry residual values improved for marine, rail and risks. Each business unit of the Company is required to
corporate aircraft. Commercial aircraft continues to develop, maintain and test these plans at least annually to
experience lower values due to the abundance of supply and ensure that recovery activities, if needed, can support
technological efficiencies on newer models. mission critical functions including technology, networks
and data centers supporting customer applications and
Operational Risk Management Operational risk represents business operations. The Company’s internal audit function
the risk of loss resulting from the Company’s operations, validates the system of internal controls through risk-based,
including, but not limited to, the risk of fraud by employees regular and ongoing audit procedures and reports on the
or persons outside the Company, the execution of effectiveness of internal controls to executive management
unauthorized transactions by employees, errors relating to and the Audit Committee of the Board of Directors.
transaction processing and technology, breaches of the Customer-related business conditions may also increase
internal control system and compliance requirements and operational risk or the level of operational losses in certain
business continuation and disaster recovery. This risk of transaction processing business units, including merchant
loss also includes the potential legal actions that could arise processing activities. Ongoing risk monitoring of customer
as a result of an operational deficiency or as a result of activities and their financial condition and operational
noncompliance with applicable regulatory standards, processes serve to mitigate customer-related operational
adverse business decisions or their implementation, and risk. Refer to Note 21 of the Notes to Consolidated
customer attrition due to potential negative publicity. Financial Statements for further discussion on merchant
The Company operates in many different businesses in processing.
diverse markets and relies on the ability of its employees While the Company believes that it has designed
and systems to process a high number of transactions. effective methods to minimize operational risks, there is no
Operational risk is inherent in all business activities, and the absolute assurance that business disruption or operational
management of this risk is important to the achievement of losses would not occur in the event of a disaster. On an
the Company’s objectives. In the event of a breakdown in ongoing basis, management makes process changes and
the internal control system, improper operation of systems investments to enhance its systems of internal controls and
or improper employees’ actions, the Company could suffer business continuity and disaster recovery plans.
financial loss, face regulatory action and suffer damage to
its reputation. Interest Rate Risk Management In the banking industry,
The Company manages operational risk through a risk changes in interest rates is a significant risk that can impact
management framework and its internal control processes. earnings, market valuations and safety and soundness of an
Within this framework, the Corporate Risk Committee entity. To minimize the volatility of net interest income and
(‘‘Risk Committee’’) provides oversight and assesses the the market value of assets and liabilities, the Company
most significant operational risks facing the Company manages its exposure to changes in interest rates through
within its business lines. Under the guidance of the Risk asset and liability management activities within guidelines
Committee, enterprise risk management personnel establish established by its Asset Liability Policy Committee
policies and interact with business lines to monitor (‘‘ALPC’’) and approved by the Board of Directors. ALPC
significant operating risks on a regular basis. Business lines has the responsibility for approving and ensuring
have direct and primary responsibility and accountability compliance with ALPC management policies, including
for identifying, controlling, and monitoring operational risks interest rate risk exposure. The Company uses Net Interest
embedded in their business activities. Business managers Income Simulation Analysis and Market Value of Equity
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