Where Do We Go From Here: Risk Management after the Financial Meltdown Kevin McCabe Wells Fargo Audit Services EVP & Chief Auditor FIRMA 24 th National Risk Management Training Conference March 29, 2010 © 2010 Wells Fargo & Co All rights reserved.

How Did We Get Here?? Everyone contributed:  Government – Legislation, Regulators, Activists …  Financial Institutions – Mortgage Brokers, Bank Lenders, Securitizations, Portfolio Managers, Pension Plans, Shadow Banks (GMAC, AIG, ) …  Oversight Groups – Boards, Audit Committees, Risk Managers, Internal Auditors, External Auditors …  Home Owners – trading up, leveraging, lying … So what is going to be done about it? 1

22 Legislation, Regulation, etc.  Very likely governments will propose new regulations, more firewalls, restrictions, taxes and penalties on Financial Institutions  Impact on us: New requirements will come in the form of ‘new’ interpretations rather than many new regulations.

New Regulator Standards for Banks  FRB SR 09-1 Market Risk Rule in BHC’s  FRB SR 08-8 Compliance Risk Management Programs and Oversight at Large Banking Organizations with Complex Compliance Profiles  SEC New Risk Management Disclosure Rules  Basel II (and coming soon III)  Senior Supervisor Group Surveys & Action Plans  What do these have in common? 3

Enterprise Risk Management  All recent regulations have pushed for enhanced enterprise risk management that has:  Corporate Head of Risk  Corporate body that sets Policy, Risk Appetite, Provides Oversight, Escalation, and Reporting to the Board  Business Line Procedures, Execution, Monitoring, Training, and Reporting  Independent Testing and Reporting  In short, you need an effective ERM Framework 4

 Many theoretical models to choose from -- COSO ERM being the most accepted in the USA  Choose an implementation that can accommodate your need to roll-up based upon Business line, Country, Legal entity and Unique risks (Basel uses only Credit, Market, and Operational)  Wells Fargo’s ERM framework has four essential roles and responsibilities 5 Enterprise Risk Management

6 ERM Framework Cultural Goal: Promote effective risk management - characterized by Accountability, Transparency, Efficiency, and Proactive Issue Identification, Disclosure, and Remediation - through clear delineation and execution of KEY ROLES & RESPONSIBILITIES.

7 ERM Framework Corporate ERM Lead the effort and set the Policy for every Line of Business (LOB) Once set up CERM should lead on emerging risks and provide Oversight. CERM should have good working relationships with the Regulators

8 ERM Framework Line of Business (LOB) to develop Procedures to meet Policy (should influence future policy changes and audit scopes) and then proactively monitor and report status to CERM.

9 ERM Framework Corporate Audit (WFAS) performs independent testing but should leverage work done by LOB control groups. Audit should also ‘advise’ on control design. Strong Audit groups should test risk management processes, not just test controls Audit should influence CERM policy & design

10 ERM Framework CERM and Audit should both report quarterly to Senior Management and the Board on the state of controls, issues, trends, etc. Longer term a joint report would be best!

11 ERM Framework Every process should meet some predetermined minimum standards. WFC has chosen Systematic, Transparent, Credible, Verifiable and Timely as our standards.

12 ERM Framework WF Legal Group Advise & influence policy Advise & advocate re: risk mgmt. execution Corporate Legal has an advisory and advocacy role as well.

13 ERM Framework WF Legal Group Advise & influence policy Advise & advocate re: risk mgmt. execution Overall this looks complex but it can work to meet every type of risk to which WFC has applied the model.

14 Evolution of the ERM framework at WFC  ERM framework built to address new regulatory expectations and requirements  “Need for speed” resulted in overlapping roles and duplicated efforts (“Risk management at the Federal, state, county, and local levels”)  Once built (and regulatory requirements met), focused on the opportunity and need to be both more effective (role clarity and no gaps) and more efficient (do things once and well)

Coordination with Internal Audit 15  Risk Management and Internal Audit need to work together for either to be considered Strong  Each can work independently, perhaps even competitively, to achieve their mission  But if they are not coordinated and working together the costs will be high and the effectiveness will be low

WFAS Success Model 16 Expand WFAS’s Capabilities Strengthen WFAS’s Fundamentals Partner with Governance and Risk Management Structure Strong Good Satisfactory

Conclusion 17  There are many causes to the last ‘Great Recession’ and there will be many short term ‘fixes’  But longer term the right solution will be fulfilling the long-held goal of effective ERM  Find a model that works and is effective for your company and culture  Ensure coordination across all control groups

Questions? 18