JP Morgan Chase 2008 Annual Report Download - page 88

Management’s discussion and analysis
86 JPMorgan Chase & Co./ 2008 Annual Report
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chase’s business activities. The
Firm’s risk management framework and governance structure are
intended to provide comprehensive controls and ongoing manage-
ment of the major risks inherent in its business activities. The Firm’s
ability to properly identify, measure, monitor and report risk is critical
to both its soundness and profitability.
• Risk identification: The Firm’s exposure to risk through its daily
business dealings, including lending, trading and capital markets
activities, is identified and aggregated through the Firm’s risk
management infrastructure. In addition, individuals who manage
risk positions, particularly those positions that are complex, are
responsible for identifying and estimating potential losses that
could arise from specific or unusual events, that may not be cap-
tured in other models, and those risks are communicated to sen-
ior management.
• Risk measurement: The Firm measures risk using a variety of
methodologies, including calculating probable loss, unexpected
loss and value-at-risk, and by conducting stress tests and making
comparisons to external benchmarks. Measurement models and
related assumptions are routinely reviewed with the goal of
ensuring that the Firm’s risk estimates are reasonable and reflect
underlying positions.
• Risk monitoring/control: The Firm’s risk management policies and
procedures incorporate risk mitigation strategies and include
approval limits by customer, product, industry, country and busi-
ness. These limits are monitored on a daily, weekly and monthly
basis, as appropriate.
• Risk reporting: Risk reporting is executed on a line of business
and consolidated basis. This information is reported to manage-
ment on a daily, weekly and monthly basis, as appropriate. There
are eight major risk types identified in the business activities of
the Firm: liquidity risk, credit risk, market risk, interest rate risk,
private equity risk, operational risk, legal and fiduciary risk, and
reputation risk.
Risk governance
The Firm’s risk governance structure starts with each line of business
being responsible for managing its own risks. Each line of business
works closely with Risk Management through its own risk committee
and, in most cases, its own chief risk officer to manage risk. Each
line of business risk committee is responsible for decisions regarding
the business’ risk strategy, policies and controls.
Overlaying the line of business risk management are four corporate
functions with risk management–related responsibilities: Treasury, the
Chief Investment Office, Legal and Compliance and Risk
Management.
Risk Management is headed by the Firm’s Chief Risk Officer, who is a
member of the Firm’s Operating Committee and who reports to the
Chief Executive Officer and the Board of Directors, primarily through
the Board’s Risk Policy Committee. Risk Management is responsible
for providing a firmwide function of risk management and controls.
Within Risk Management are units responsible for credit risk, market
risk, operational risk and private equity risk, as well as Risk
Management Services and Risk Technology and Operations. Risk
Management Services is responsible for risk policy and methodology,
risk reporting and risk education; and Risk Technology and
Operations is responsible for building the information technology
infrastructure used to monitor and manage risk.
Treasury and the Chief Investment Office are responsible for measur-
ing, monitoring, reporting and managing the Firm’s liquidity, interest
rate and foreign exchange risk.
Legal and Compliance has oversight for legal and fiduciary risk.
In addition to the risk committees of the lines of business and the
above-referenced corporate functions, the Firm also has an
Investment Committee, ALCO and two other risk-related committees,
namely, the Risk Working Group and the Markets Committee. The
members of these committees are composed of senior management
of the Firm, including representatives of line of business, Risk
Management, Finance and other senior executives. Members of these
risk committees meet frequently to discuss a broad range of topics
including, for example, current market conditions and other external
events, current risk exposures and concentrations to ensure that the
impact of current risk factors are considered broadly across the Firm’s
businesses.