Credit Risk Management at JP Morgan Chase

Abstract

JP Morgan Chase (JP), the second largest financial services company in the US, is exposed to credit risk through its lending, trading and capital market activities. JP''s credit risk management practices are designed to preserve the independence and integrity of the risk assessment process. JP has taken various steps to ensure that credit risks are adequately assessed, monitored and managed. In early 2003, JP has combined its Credit Risk Policy and Global Credit Management functions to form Global Credit Risk Management consisting of the five primary functions - Credit Risk Management, Credit Portfolio Group, Policy & Strategic Group, Special Credits Group and Chase Financial Services (CFS) Consumer Credit Management Risk.

INTRODUCTION

JP Morgan Chase (JP) was exposed to credit risk through its lending, trading and capital market activities. JP's credit risk management (CRM) practices were designed to preserve the independence and integrity of the risk assessment process. JP had taken various steps to ensure that credit risks were adequately assessed, monitored and managed.

In early 2003, the Credit Risk Policy and Global Credit Management functions were combined to form Global CRM consisting of the five primary functions - Credit Risk Management, Credit Portfolio Group, Policy & Strategic Group, Special Credits Group and Chase Financial Services (CFS) Consumer Credit Management Risk.

To measure commercial credit risk, JP estimated the likelihood of default; the amount of exposure in case of default and the loss severity given a default event. Based on these factors and related market-based inputs, JP estimated both expected and unexpected losses for each segment of the portfolio. Expected losses were statistically based estimates of credit losses over time. They were used to set risk-adjusted credit loss provisions. Such losses could be factored into the pricing and covered as a normal and recurring cost of doing business. Unexpected losses represented the potential volatility of actual losses relative to the expected level of losses and formed the basis for the credit risk capital-allocation process.

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        Case Code   FINA003
   Case Length    22 Pages
              Period    2002 - 2003
 Organization     JP Morgan Chase
        Pub Date     2005
Teaching Note    Not Available
     Countries    USA
      Industry    Banking

Issues

Credit Risk Management

JP Morgan Chase, Credit risk, Commercial portfolio, Consumer credit risk, Consumer portfolio, Derivatives, Economic credit exposure, Derivative receivables, Commercial exposure, Commercial criticised exposure, Industry concentrations, Country exposure, Derivative contracts, Notional amounts

Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.