JP Morgan Chase 2006 Annual Report Download - page 63

JPMorgan Chase & Co. / 2006 Annual Report 61
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s
risk management framework and governance structure are intended to pro-
vide comprehensive controls and ongoing management of the major risks
inherent in its business activities. The Firm’s ability to properly identify, meas-
ure, 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 identi-
fied and aggregated through the Firm’s risk management infrastructure.
• Risk measurement: The Firm measures risk using a variety of method-
ologies, 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 ensuring that the Firm’s risk estimates are rea-
sonable and reflect underlying positions.
• Risk monitoring/control: The Firm’s risk management policies and pro-
cedures incorporate risk mitigation strategies and include approval limits
by customer, product, industry, country and business. These limits are moni-
tored on a daily, weekly and monthly basis, as appropriate.
• Risk reporting: Risk reporting is executed on a line of business and 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, private equity risk,
operational risk, legal and reputation risk, and fiduciary risk.
Risk governance
The Firm’s risk governance structure starts with each line of business being
responsible for managing its own risk. Each line of business works closely
with Risk Management of the Firm, through its own risk committee and, in
most cases, its own chief risk officer. Each risk committee is responsible for
decisions regarding the business’ risk strategy, policies and controls.
Overlaying the line of business risk management are five corporate functions
with risk management–related responsibilities, including the Asset-Liability
Committee, Treasury, Chief Investment Office, Office of the General Counsel
and Risk Management.
The Asset-Liability Committee is responsible for approving the Firm’s liquidity
policy, including contingency funding planning and exposure to SPEs (and any
required liquidity support by the Firm of such SPEs). The committee also over-
sees the Firm’s capital management and funds transfer pricing policy (through
which lines of business “transfer” interest and foreign exchange risk to
Treasury in the Corporate segment). The Committee is composed of the Firm’s
Chief Financial Officer, Chief Risk Officer, Chief Investment Officer, Corporate
Treasurer and the Chief Financial Officers of each line of business.
Treasury and the Chief Investment Office are responsible for measuring, moni-
toring, reporting and managing the Firm’s liquidity, interest rate and foreign
exchange risk.
The Office of the General Counsel has oversight for legal and reputation and
fiduciary risks.
Risk Management is responsible for providing a firmwide function of risk man-
agement and controls. Within Risk Management are units responsible for credit
risk, market risk, operational risk and private equity risk, as well as Risk
Management Services and Risk Technology and Operations. Risk Management
Services is responsible for risk policy and methodology, risk reporting and risk
education; and Risk Technology and Operations is responsible for building the
information technology infrastructure used to monitor and manage risk. Risk
Management is headed by the Firm’s Chief Risk Officer, who is a member of the
Operating Committee and reports to the Chief Executive Officer and the Board
of Directors, primarily through the Board’s Risk Policy Committee and Audit
Committee. The person who filled the position of Chief Risk Officer during 2006
retired at the end of the year. Until his replacement is named, the Firm’s Chief
Executive Officer is acting as the interim Chief Risk Officer.
In addition to the risk committees of the lines of business and the above-ref-
erenced corporate functions, the Firm also has an Investment Committee,
which oversees global merger and acquisition activities undertaken by
JPMorgan Chase for its own investment account, that fall outside the scope
of the Firm’s private equity and other principal finance activities.
Investment
Committee
Operating Committee
Asset-Liability
Committee
Treasury and Chief Investment Office (Liquidity Risk and Nontrading Interest Rate and Foreign Exchange Risk)
Risk Management (Credit Risk, Market Risk, Private Equity Risk, Operational Risk, Risk Technology & Operations,
Risk Management Services)
Office of the General Counsel (Legal and Reputation Risk, and Fiduciary Risk)
Commercial
Banking
Risk Committee
Investment Bank
Risk Committee
Retail Financial
Services Risk
Committee
Card Services
Risk Committee
Treasury &
Securities Services
Risk Committee
Asset Management
Risk Committee