Credit Risk Management at JP Morgan Chase ( Page 2)

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.

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Business Strategy & Risk Management contd...

In 2003, JP significantly modified its approach to commercial CRM. The three primary initiatives launched were: improved single-name and industry concentration management, through a revised threshold and limit structure; a revised capital methodology; and increased portfolio management activity utilizing credit derivatives and loan sales.

JP managed capital and exposure concentrations by obligor, risk rating, industry and geography. JP had reduced the number of clients by 50% whose credit exposure exceeded the narrowest definition ofconcentration limits during 2003. JP did this through focused client planning and portfolio management activities. A comprehensive review of JP’s wholesale CRM infrastructure was completed in 2003. JP launched a major initiative to reengineer and simplify specific components of the credit risk infrastructure, using more standardized hardware and software platforms.

The goal of the initiative was to enhance the firm’s ability to provide immediate and accurate risk and exposure information; actively manage credit risk in the residual portfolio; support client relationships; quickly manage the allocation of economic capital; and support compliance with Basel II initiatives.

Consumer

Consumer credit risks were monitored at the aggregate level and within each line of business (mortgages, credit cards, automobile finance, small business and consumer banking). Consumer CRM used sophisticated portfolio modeling, credit scoring and decision-support tools to project credit risks and establish underwriting standards. Risk parameters were established in the early stages of product development. The cost of credit risk was an integral part of product pricing and evaluating profit dynamics. Losses generated by consumer loans were more predictable than those generated by commercial loans, but were subject to cyclical and seasonal factors. ......

        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.