The quiet revolutionary

Bank of America is in transition. Most visibly, its chairman and chief executive, Hugh McColl – largely responsible for merging NationsBank and Bank of America into the US’s largest bank in 1998 – is retiring this month. But more profound changes are occurring behind the scenes.

The Charlotte, North Carolina-based bank has adopted an integrated, cross-product marketing approach it hopes will better serve its clients’ needs. It is also establishing a risk-based capital allocation system. These initiatives are central to the success of the bank’s recently established global risk management products group, run by William Fall.

Fall came to NationsBank during its attempts to build an over-the-counter derivatives capability in Chicago, after its 1993 acquisition of the exchange-traded options firm Chicago Research and Trading.

He began his career in finance with Kleinwort Benson back in the early 1980s, and has worked in derivatives and risk management since about 1984 – with one hiatus to earn his masters degree in architecture. But that was not his only foray beyond the world of finance. Fall started out as a veterinary surgeon in the UK. “My father was a farmer, my mother was a doctor. It was the eternal English compromise,” Fall says.
Seeking different challenges, he turned to finance. The transition went surprisingly smoothly. “The English merchant banks at that time were not interested in MBAs, they wanted bright people who they could train,” he says.

Today, he runs a group with nearly 900 people worldwide, incorporating Bank of America’s foreign exchange, fixed-income derivatives, commodity derivatives, exchange-traded and credit derivatives businesses, including both generic and structured products. In February, the bank combined the derivative products businesses that had been under Fall with its 380-person foreign exchange business. The move was spurred by the retirement of Robert McKnew, the former head of global foreign exchange, and the desire to capture infrastructure efficiencies and better integrate the product lines.

Fall emphasises that this is not an attempt to staff the sales team with generalists. Rather, the bank is taking a team-oriented approach based on strong quantitative research support. Fall notes that part of the inspiration for this came from the firm’s foreign exchange research team, which had a strong macro research capability but also the ability to generate actionable deal ideas.

One manifestation of this focus was the bank’s formation of a quantitative interest rate modelling group in London in February. Among those hired for the group was Jesper Andreasen, this year’s winner of Risk’s quant of the year award.

Fall says the greater sophistication of corporate clients is driving the trend toward solution-oriented, cross-product approaches. “There are now about 12 banks fighting it out tooth and nail in the global market business,” Fall says. “We think, to succeed, you need to tie all the products together in a structure that is integrated around the client’s needs. Thinking from a client point of view, rather than from a product perspective, is becoming the criterion for success going forward,” he says.

Meanwhile, the bank is reviewing its approach to allocating capital. It was one of the first banks to embrace risk-adjusted return on capital. But it did not apply it to capital allocation decision-making. “We should be allocating capital on that basis now,” Fall says. “But we got somewhat distracted in the merger. Part of [our] goal is to have much more of our allocation of capital done on the basis of returns. But we must be very comfortable with the metrics we choose.”

The bank is seeking to develop a core unit of risk to use as a capital allocation metric. But this is a challenge. “We are boiling down all types of risk into a common metric that we can use to allocate capital across businesses,” he says. “You need to be able to compare the risks of different products. For example, how much risk is in a one-year funded credit versus a forex option?”

The bank’s next challenge will be to devise standards for allocating capital against these risks. “For example,” Fall says, “how much capital do you allocate to a five-year swap with Ford? How does it change if you collateralise it with single-A or triple-B collateral? What if you buy protection on the first loss position?”

A third concurrent and related initiative is the bank’s review of its credit portfolio. “Traditionally we’ve had large amounts of floating-rate loans in our portfolio. Now we are getting nearer to a more dynamic portfolio-based approach,” Fall says. “We are looking at mechanisms for distribution of risk, not only through loan sales but also through synthetics and other mechanisms.”

Investors’ worries about the bank’s credit portfolio – in particular, its loan exposure to the troubled California utilities – combined with unfounded rumours of derivatives trading losses, triggered a short-term drop in stock in January. While investors focused on the news, Fall says he was surprised by how few clients called up to enquire about it, which he attributes to their being comfortable with the bank’s prospects.

While Fall strikes a bearish note about the prospects for the economy, he says Bank of America is well positioned to expand its global markets businesses, despite the downturn. “I think the pending recession is going to be pretty grim, but I still think we should be able to get 20% year-on-year increases in gross revenues,” he says. In particular, he sees growth potential in non-US markets. “We make 25% of our global revenues in non-US markets. That percentage should be higher,” he says.

One area he is adamant about protecting from downturn-related budget cuts is e-commerce. “The worst thing you can do right now is cut back on investment in e-commerce,” he says. “I still do not feel the industry understands all of the ramifications of e-commerce. It will cause a fundamental change in the ways of thinking about our businesses.”

While Bank of America has suffered in the past from misperceptions about the strength of its businesses, it has also been partly to blame for its shortfalls. The groundwork it is laying now could finally allow it to achieve its global ambitions.