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Monday, December 22, 2008

Credit card: Strategic Risk

Strategic risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of
those decisions. This risk is a function of the compatibility between an organization’s strategic goals, the business
strategies developed to achieve those goals, the resources deployed against these goals, and the quality of
implementation. The resources needed to carry out business strategies are both tangible and intangible. They include
communication channels, operating systems, delivery networks, and managerial capacities and capabilities.
Strategic risk in credit card lending can arise when business decisions adversely impact the quantity or quality of
products, services, operating controls, management supervision, or technology. Management’s knowledge of the economic dynamics and market conditions of the industry can help limit strategic risk. For example, banks may be
exposed to strategic risk if they inadequately plan or market preapproved credit card solicitation programs. To mitigate
the risk, management must fully test new markets, analyze results, and refine solicitation offers to limit the risk of booking
new credit card accounts that do not perform as anticipated.
Examiners assess strategic risk by determining whether bank management has evaluated the feasibility and profitability
of each new credit card product and service before it is offered. They also determine whether the bank’s pricing, growth,
and acquisition strategies realistically consider economic and market factors. In particular, examiners evaluate whether
a proper balance exists between the bank’s willingness to accept risk and its supporting resources and controls.

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