JP Morgan Chase 2003 Annual Report Download - page 122

Notes to consolidated financial statements
J.P. M organ Chase & Co.
120 J.P. Morgan Chase & Co./ 2003 Annual Report
The table below presents both on-balance sheet and off-balance sheet commercial- and consumer-related credit exposure as of
December 31, 2003 and 2002:
2003 2002
Credit On-balance Off-balance Credit On-balance Off-balance
December 31, (in billions) exposure sheet (a) sheet (b) exposure sheet (a) sheet(b)
Commercial-related:
Commercial banks $47.1 $ 36.5 $ 10.6 $42.2 $ 33.7 $ 8.5
Asset managers 21.8 11.7 10.1 24.9 12.3 12.6
Securities firms and exchanges 15.6 9.3 6.3 17.5 11.7 5.8
Finance companies and lessors 15.6 3.1 12.5 19.0 4.1 14.9
Utilities 15.3 3.7 11.6 17.7 6.4 11.3
All other commercial 267.3 102.7 164.6 291.6 106.6 185.0
Total commercial-related $382.7 $ 167.0 $ 215.7 $ 412.9 $ 174.8 $ 238.1
Consumer-related:
Credit cards(c) $157.9 $ 16.8 $ 141.1 $ 143.1 $ 19.7 $ 123.4
1–4 family residential mortgages 102.5 73.7 28.8 84.0 64.0 20.0
Automobile financings 41.3 38.7 2.6 35.4 33.6 1.8
All other consumer 11.6 7.2 4.4 13.4 7.5 5.9
Total consumer-related $313.3 $ 136.4 $ 176.9 $ 275.9 $ 124.8 $ 151.1
Total exposure $696.0 $ 303.4 $ 392.6 $ 688.8 $ 299.6 $ 389.2
(a) Represents loans, and derivative and other receivables.
(b) Represents lending-related financial instruments.
(c) Excludes $34.9 billion and $30.7 billion of securitized credit card receivables at December 31, 2003 and 2002, respectively.
Fair value of financial instruments
The fair value of a financial instrument is the amount at w hich
the instrument could be exchanged in a current transaction
betw een w illing parties, other than in a forced or liquidation sale.
The accounting for an asset or liability may differ based on the
type of instrument and/or its use in a trading or investing strategy.
Generally, the measurement framework recorded in financial
statements is one of the follow ing:
•at fair value on the Consolidated balance sheet, w ith
changes in fair value recorded each period in the
Consolidated statement of income
•at fair value on the Consolidated balance sheet, w ith
changes in fair value recorded each period in a separate
component of stockholders’ equity and as part of Other
comprehensive income
•at cost (less other-than-temporary impairments), w ith
changes in fair value not recorded in the financial statements
but disclosed in the notes thereto
•at the lower of cost or fair value.
The Firm has a w ell-established and w ell-documented process
for determining fair values. Fair value is based on quoted market
prices, w here available. If listed prices or quotes are not available,
fair value is based on internally developed models that primarily
use market-based or independent information as inputs to the
valuation model. Valuation adjustments may be necessary to
ensure that financial instruments are recorded at fair value.
Note 31 Valuation adjustments include amounts to reflect counterparty
credit quality, liquidity and concentration concerns and are based
on defined methodologies that are applied consistently over time.
•Credit valuation adjustments are necessary when the market
price (or parameter) is not indicative of the credit quality of
the counterparty. As few derivative contracts are listed on
an exchange, the majority of derivative positions are valued
using internally developed models that use as their basis
observable market parameters. M arket practice is to quote
parameters equivalent to a AA credit rating: thus, all coun-
terparties are assumed to have the same credit quality. An
adjustment is therefore necessary to reflect the credit quality
of each derivative counterparty and to arrive at fair value.
Without this adjustment, derivative positions w ould not be
appropriately valued.
•Liquidity adjustments are necessary w hen the Firm may
not be able to observe a recent market price for a financial
instrument that trades in inactive (or less active) markets.
Thus, valuation adjustments for risk of loss due to a lack of
liquidity are applied to those positions to arrive at fair value.
The Firm tries to ascertain the amount of uncertainty in the
initial valuation based upon the liquidity or illiquidity, as the
case may be, of the market in w hich the instrument trades
and makes liquidity adjustments to the financial instruments.
The Firm measures the liquidity adjustment based on the
following factors: (1) the amount of time since the last rele-
vant pricing point; (2) w hether there was an actual trade or
relevant external quote; and (3) the volatility of the principal
component of the financial instrument.