JP Morgan Chase 2009 Annual Report Download - page 96

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report
94
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chase’s business activities and
the Firm’s overall risk tolerance is established in the context of the
Firm’s earnings power, capital, and diversified business model. 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. It is also
intended to create a culture of risk awareness and personal responsi-
bility throughout the Firm. 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 that are complex, are responsible
for identifying and estimating potential losses that could arise from
specific or unusual events that may not be captured in other mod-
els, and those risks are communicated to senior 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 en-
suring 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: Executed on both a line of business and a con-
solidated basis. This information is reported to management 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, pri-
vate 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 its own chief risk officer to manage its risk. Each line of business
risk committee is responsible for decisions regarding the business’ risk
strategy, policies and controls. The Firm’s Chief Risk Officer is a
member of the line of business risk committees.
Overlaying the line of business risk management are four corporate
functions with risk management–related responsibilities, including
the Chief Investment Office, Corporate Treasury, Legal and Compli-
ance 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 an independent firmwide function of risk
management and controls. Within the Firm’s Risk Management
function are units responsible for credit risk, market risk, operational
risk and private equity risk, as well as risk reporting, risk policy and
risk technology and operations. Risk technology and operations is
responsible for building the information technology infrastructure
used to monitor and manage risk.
The Chief Investment Office and Corporate Treasury are responsi-
ble for measuring, 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 risk management functions, the Firm also has an
Investment Committee, an Asset-Liability Committee and three
other risk-related committees – the Risk Working Group, the Global
Counterparty Committee and the Markets Committee. All of these
committees are accountable to the Operating Committee which is
involved in setting the Firm’s overall risk appetite. The membership
of these committees are composed of senior management of the
Firm, including representatives of lines of business, Risk Manage-
ment, Finance and other senior executives. The committees meet
frequently to discuss a broad range of topics including, for example,
current market conditions and other external events, risk exposures,
and risk concentrations to ensure that the impact of risk factors are
considered broadly across the Firm’s businesses.