JP Morgan Chase 2003 Annual Report Download - page 55

J.P. Morgan Chase & Co. / 2003 Annual Report 53
For commercial lending-related commitments, the Firm measures
its Economic credit exposure using a “ loan equivalent” amount
for each commitment, rather than the contractual amount of the
lending-related commitment. The contractual amount represents
the maximum possible credit risk should the counterparty draw
dow n the commitment and subsequently default. How ever, most
of these commitments expire w ithout a default occurring or w ith-
out being drawn. As a result, the total contractual amount of
these instruments is not, in the Firm’s view, representative of the
Firm’s actual future credit exposure or funding requirements. In
determining the Firm’s Economic credit exposure to commercial
lending-related commitments, the Firm has established a “ loan-
equivalent” amount for each commitment. The loan-equivalent
amount represents the portion of the unused commitment or
other contingent exposure that is likely, based on average portfolio
historical experience, to become outstanding in the event of a
default by the obligor. It is this amount that, in management’s
view, represents the Firm’s Economic credit exposure to the
obligor. The aggregate amount of its Economic credit exposure
associated w ith commercial lending-related commitments w as
$106.9 billion in 2003, compared with $115.5 billion in 2002.
The follow ing table reconciles commercial lending–related
commitments on a GAAP basis w ith the Firm’s Economic credit
exposure basis, a non-GAAP financial measure.
Reconciliation of Commercial Lending-Related
Commitments to Economic Credit Exposure
As of December 31, (in billions) 2003 2002
Commercial lending-relat ed com mitment s:
Reported amount $216 $238
Loan equivalent (“ LEQ” ) adjustment (109) (123)
Economic credit exposure $107 $115
by a $5.8 billion increase related to VIEs consolidated in accor-
dance w ith FIN 46. The decrease in lending-related commitments
w as due to an overall contraction in lending demand and
reflected a $6.3 billion decline due to the adoption of FIN 46.
For further discussion of FIN 46, see Note 14 on pages 103–106
of this Annual Report.
The Firm also views its credit exposure on an “ Economic” basis,
w hich is the basis upon which it allocates credit capital to the
lines of business. The principal difference betw een the Firm’s
credit exposure on a reported basis and Economic credit expo-
sure relates to the w ay the Firm view s its credit exposure to
derivative receivables and lending-related commitments.
For derivative receivables, the Firm measures its Economic credit
exposure using the Average exposure (“ AVG” ) metric. This is a
measure of the expected M TM value of the Firm’s derivative
receivables at future time periods, including the benefit of col-
lateral. The three-year average of the AVG metric is the Firm’s
Economic measure of derivative risk since three years is the
average remaining life of the derivatives portfolio; it w as
$34 billion as of December 31, 2003. For more information,
see the Derivative contracts section of this Annual Report.
The follow ing table reconciles Derivative receivables on a M TM
basis w ith the Firm’s Economic credit exposure basis, a non-GAAP
financial measure.
Reconciliation of Derivative Receivables to Economic
Credit Exposure
As of December 31, (in billions) 2003 2002
Derivative receivables:
Derivative receivables MTM $84 $83
Collateral held against derivatives (36) (30)
Derivative receivables – net current exposure 48 53
Reduction in exposure to 3-year average exposure (14) (19)
Economic credit exposure $34 $34