JP Morgan Chase 2009 Annual Report Download - page 103

JPMorgan Chase & Co./2009 Annual Report 101
CREDIT RISK MANAGEMENT
Credit risk is the risk of loss from obligor or counterparty default.
The Firm provides credit (for example, through loans, lending-
related commitments, guarantees and derivatives) to a variety of
customers, from large corporate and institutional clients to the
individual consumer. For the wholesale business, credit risk man-
agement includes the distribution of the Firm’s syndicated loan
originations into the marketplace with exposure held in the re-
tained portfolio averaging less than 10%. Wholesale loans gener-
ated by CB and AM are generally retained on the balance sheet.
With regard to the consumer credit market, the Firm focuses on
creating a portfolio that is diversified from both a product and a
geographic perspective. Loss mitigation strategies are being em-
ployed for all home lending portfolios. These strategies include rate
reductions, forbearance and other actions intended to minimize
economic loss and avoid foreclosure. In the mortgage business,
originated loans are either retained in the mortgage portfolio or
securitized and sold to U.S. government agencies and U.S. govern-
ment-sponsored enterprises.
Credit risk organization
Credit risk management is overseen by the Chief Risk Officer and
implemented within the lines of business. The Firm’s credit risk
management governance consists of the following functions:
• establishing a comprehensive credit risk policy framework
• monitoring and managing credit risk across all portfolio
segments, including transaction and line approval
• assigning and managing credit authorities in connection with
the approval of all credit exposure
• managing criticized exposures and delinquent loans
• calculating the allowance for credit losses and ensuring appro-
priate credit risk-based capital management
Risk identification
The Firm is exposed to credit risk through lending and capital
markets activities. Credit risk management works in partnership
with the business segments in identifying and aggregating expo-
sures across all lines of business.
Risk measurement
To measure credit risk, the Firm employs several methodologies for
estimating the likelihood of obligor or counterparty default. Meth-
odologies for measuring credit risk vary depending on several
factors, including type of asset (e.g., consumer installment versus
wholesale loan), risk measurement parameters (e.g., delinquency
status and credit bureau score versus wholesale risk-rating) and risk
management and collection processes (e.g., retail collection center
versus centrally managed workout groups). Credit risk measure-
ment is based on the amount of exposure should the obligor or the
counterparty default, the probability of default and the loss severity
given a default event. Based on these factors and related market-
based inputs, the Firm estimates both probable and unexpected
losses for the wholesale and consumer portfolios. Probable losses,
reflected in the provision for credit losses, are based primarily upon
statistical estimates of credit losses as a result of obligor or coun-
terparty default. However, probable losses are not the sole indica-
tors of risk. If losses were entirely predictable, the probable loss
rate could be factored into pricing and covered as a normal and
recurring cost of doing business. Unexpected losses, reflected in the
allocation of credit risk capital, represent the potential volatility of
actual losses relative to the probable level of losses. Risk measure-
ment for the wholesale portfolio is assessed primarily on a risk-
rated basis; for the consumer portfolio, it is assessed primarily on a
credit-scored basis.
Risk-rated exposure
For portfolios that are risk-rated (generally held in IB, CB, TSS and
AM), probable and unexpected loss calculations are based on esti-
mates of probability of default and loss given default. Probability of
default is the expected default calculated on an obligor basis. Loss
given default is an estimate of losses given a default event and takes
into consideration collateral and structural support for each credit
facility. Calculations and assumptions are based on management
information systems and methodologies which are under continual
review. Risk ratings are assigned to differentiate risk within the
portfolio and are reviewed on an ongoing basis by Credit Risk Man-
agement and revised, if needed, to reflect the borrowers’ current
financial position, risk profiles and the related collateral and structural
positions.
Credit-scored exposure
For credit-scored portfolios (generally held in RFS and CS), probable
loss is based on a statistical analysis of inherent losses over discrete
periods of time. Probable losses are estimated using sophisticated
portfolio modeling, credit scoring and decision-support tools to
project credit risks and establish underwriting standards. In addition,
common measures of credit quality derived from historical loss ex-
perience are used to predict consumer losses. Other risk characteris-
tics evaluated include recent loss experience in the portfolios, changes
in origination sources, portfolio seasoning, loss severity and underly-
ing credit practices, including charge-off policies. These analyses are
applied to the Firm’s current portfolios in order to estimate delin-
quencies and severity of losses, which determine the amount of
probable losses. These factors and analyses are updated at least on a
quarterly basis or more frequently as market conditions dictate.
Risk monitoring
The Firm has developed policies and practices that are designed to
preserve the independence and integrity of the approval and deci-
sion-making process of extending credit, and to ensure credit risks
are assessed accurately, approved properly, monitored regularly
and managed actively at both the transaction and portfolio levels.
The policy framework establishes credit approval authorities, con-
centration limits, risk-rating methodologies, portfolio review pa-
rameters and guidelines for management of distressed exposure.
Wholesale credit risk is monitored regularly on both an aggregate
portfolio level and on an individual customer basis. Management of
the Firm’s wholesale exposure is accomplished through a number