JP Morgan Chase 2003 Annual Report Download - page 49

J.P. Morgan Chase & Co. / 2003 Annual Report 47
Liquidity management
In managing liquidity, management considers
a variety of liquidity risk measures as w ell as
market conditions, prevailing interest rates,
liquidity needs and the desired maturity profile
of its liabilities.
Overview
Liquidity risk arises from the general funding needs of the Firm’s
activities and in the management of its assets and liabilities.
JPM organ Chase recognizes the importance of sound liquidity
management as a key factor in maintaining strong credit ratings
and utilizes a liquidity framew ork intended to maximize liquidity
access and minimize funding costs. Through active liquidity
management, the Firm seeks to ensure that it w ill be able to
replace maturing obligations w hen due and fund its assets at
appropriate maturities and rates in all market environments.
Liquidity management f ramework
The Capital Committee sets the overall liquidity policy for the
Firm, reviews the contingency funding plan and recommends bal-
ance sheet targets for the Firm. The Liquidity Risk Committee,
reporting to the Capital Committee, identifies and monitors liq-
uidity issues, provides policy guidance and maintains an evolving
contingency plan. The Balance Sheet Committee, w hich also
reports to the Capital Committee, identifies and monitors key
balance sheet issues, provides policy guidance and oversees
adherence to policy.
JPM organ Chase utilizes liquidity monitoring tools to help main-
tain appropriate levels of liquidity through normal and stress
periods. The Firm’s liquidity analytics rely on management’s judg-
ment about JPM organ Chase’s ability to liquidate assets or use
them as collateral for borrowings. These analytics also involve
estimates and assumptions, taking into account credit risk man-
agement’s historical data on the funding of loan commitments
(e.g., commercial paper back-up facilities), liquidity commitments
to SPEs, commitments w ith rating triggers and collateral posting
requirements. For further discussion of SPEs and other off–bal-
ance sheet arrangements, see Off–balance sheet arrangements
and contractual cash obligations on pages 49–50 as w ell as
Note 1, Note 13 and Note 14 on pages 86–87, 100–103 and
103–106, respectively, of this Annual Report.
The Firm’s three primary measures of liquidity are:
• Holding company short-term surplus: M easures the parent
holding company’s ability to repay all obligations w ith a matu-
rity under one year at a time w hen the ability of the Firm’s
banks to pay dividends to the parent holding company is con-
strained.
• Cash capital surplus: M easures the Firm’s ability to fund assets
on a fully collateralized basis, assuming access to unsecured
funding is lost.
• Basic surplus: M easures JPM organ Chase Bank’s ability to sustain
a 90-day stress event that is specific to the Firm w here no new
funding can be raised to meet obligations as they come due.
Each of the Firm’s liquidity surplus positions, as of December 31,
2003, indicates that JPM organ Chase’s long-dated funding, includ-
ing core deposits, exceeds illiquid assets and that the Firm’s obliga-
tions can be met if access to funding is temporarily impaired.
An extension of the Firm’s ongoing liquidity management is its
contingency funding plan, w hich is intended to help the Firm
manage through liquidity stress periods. The plan considers tem-
porary and long-term stress scenarios and forecasts potential
funding needs w hen access to unsecured funding is severely lim-
ited or nonexistent. These scenarios take into account both on–
and off–balance sheet exposures, evaluating access to funds by
the parent holding company, JPM organ Chase Bank and Chase
M anhattan Bank USA, N.A., separately.
Funding
Credit ratings: The cost and availability of unsecured financing
are influenced by credit ratings. A reduction in these ratings could
adversely affect the Firm’s access to liquidity sources, and could
increase the cost of funding or trigger additional collateral require-
ments. Critical factors in maintaining high credit ratings include: a
stable and diverse earnings stream; strong capital ratios; strong
credit quality and risk management controls; diverse funding
sources; and strong liquidity monitoring procedures.
intangible assets primarily due to an acquisition in the fourth
quarter of 2003. There w as minimal impact to the Firm’s Tier 1
and Total capital ratios due to the adoption of FIN 46, as the
Federal Reserve Board provided interim regulatory capital relief
related to asset-backed commercial paper conduits and trust
preferred vehicles. The effect of FIN 46 on the Firm’s leverage
ratio at December 31, 2003, w as a reduction of approximately
13 basis points as no regulatory capital relief w as provided for
leverage calculations. The Firm revised its calculation of risk-
w eighted assets during the third quarter of 2003; capital ratios
for periods ended prior to June 30, 2003, have not been recal-
culated. Additional information regarding the Firm’s capital
ratios and a more detailed discussion of federal regulatory capi-
tal standards are presented in Note 26 on pages 114–115 of
this Annual Report.
Stock repurchases: The Firm did not repurchase any shares of
its common stock during 2003. M anagement expects to recom-
mend to the Board of Directors that the Firm resume its share
repurchase program after the completion of the pending merger
w ith Bank One.
Dividends: Dividends declared in any quarter are determined by
JPM organ Chase’s Board of Directors. The dividend is currently
$0.34 per share per quarter.