Job Title American Express Revision 24 Serial Date / Time Saturday, February 28, 2009 2:31 AM Job Title American Express Revision 24 Serial Date / Time Saturday, February 28, 2009 2:31 AM Job Number 174761 Type Current Page No. 44 Operator PM2 Job Number 174761 Type Current Page No. 45 Operator PM2

2008 financial review american express company

consumer credit contractual rights of risk mitigation, monitor risk exposures, Consumer arises principally from consumer and and determine risk mitigation actions. The IRMC formally small business charge cards, credit cards, lines of credit, and reviews large institutional exposures to ensure compliance loans. These portfolios consist of millions of borrowers across with ERMC guidelines and procedures and escalates them multiple geographies, occupations, industries and levels of to the ERMC as appropriate. At the same time, the IRMC net worth. The Company benefits from the attractive profile provides continuous guidance to business unit risk teams to of its cardmembers, which is driven by brand positioning, optimize risk-adjusted returns on capital. A company-wide risk underwriting, and customer management policies, premium rating utility and a specialized airline risk group provide risk customer servicing, and product reward features. The risk in assessment of institutional obligors. these portfolios is correlated with broad economic trends, such as unemployment rates and home values, which can have a management process material affect on credit performance. Market risk is the risk to earnings or value resulting from General principles and the overall framework for managing movements in market prices. The Company’s market risk consumer credit risk across the Company are defined in the exposure is primarily generated by: Individual Credit Risk Policy approved by the ERMC. This • in its card, insurance, and certificate policy is further supported by subordinate policies and practices businesses; and covering all facets of consumer credit extension, including prospecting, approvals, authorizations, line management, • in its international operations. collections, and fraud prevention. These policies ensure General principles and the overall framework for managing consistent application of credit management principles and market risk across the Company are defined in the Market Risk standardized reporting of asset quality and loss recognition. Policy approved by the ERMC. Market risk is centrally managed Consumer credit risk management is supported by by the Market Risk Committee, chaired by the Chief Market sophisticated proprietary scoring and decision-making models Risk Officer of the Company. Within each business, market that use the most up-to-date proprietary information on risk exposures are monitored and managed by various asset/ customers, such as spending and payment history, data feeds from liability committees, guided by Board-approved policies covering credit bureaus, and mortgage information. The Company has derivative financial instruments, funding and investments. developed unique decision logic for each customer interaction, Derivative financial instruments derive their value from an including prospect targeting, new account approvals, line underlying variable or multiple variables, including interest rate, assignment, balance transfers, cross selling and overall account foreign exchange, and equity indices or prices. These instruments management and collection. enable end users to increase, reduce or alter exposure to various market and, for that reason, are an integral component of the institutional credit risk Company’s market risk and related asset/liability management Institutional credit risk arises principally within the Company’s strategy and processes. Use of derivative financial instruments is corporate card services, merchant services, network services, and incorporated into the discussion below as well as Note 14. from the Company’s investment activities. Unlike consumer Market exposure is a byproduct of the delivery of products credit risk, institutional credit risk is characterized by a lower and services to cardmembers. Interest rate risk is primarily loss frequency but higher severity. It is affected both by general generated by funding cardmember charges and fixed-rate economic conditions and by borrower-specific events. The loans with variable rate borrowings. These assets and liabilities Company’s senior risk officers recognize that the absence of large generally do not create naturally offsetting positions with losses in any given year or over several years is not necessarily respect to basis, re-pricing, or maturity characteristics. representative of the risk of institutional portfolios, given the For the Company’s charge card and fixed-rate lending infrequency of loss events in such portfolios. products, interest rate exposure is managed by shifting the General principles and the overall framework for managing mix of funding toward fixed-rate debt and by using derivative institutional credit risk across the Company are defined in instruments, with an emphasis on interest rate swaps, which the Institutional Credit Risk Policy approved by the ERMC. effectively fix interest expense for the length of the swap. The The Institutional Risk Management Committee (IRMC) is Company may change the amount hedged and the responsible for implementation and enforcement of this policy percentage may change based on changes in business volumes and for providing guidance to the credit officers of each business and mix, among other factors. For the majority of its cardmember unit with substantial institutional credit risk exposures, who in loans, which are linked to a floating rate base and generally turn make investment decisions in core risk capabilities, ensure reprice each month, the Company uses floating rate funding. proper implementation of the underwriting standards and The Company regularly reviews its strategy and may modify

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