JP Morgan Chase 2008 Annual Report Download - page 113

JPMorgan Chase & Co./ 2008 Annual Report 111
MARKET RISK MANAGEMENT
Market risk is the exposure to an adverse change in the market value
of portfolios and financial instruments caused by a change in market
prices or rates.
Market risk management
Market risk is identified, measured, monitored, and controlled by
Market Risk, a corporate risk governance function independent of the
lines of business. Market Risk seeks to facilitate efficient risk/return
decisions, reduce volatility in operating performance and make the
Firm’s market risk profile transparent to senior management, the
Board of Directors and regulators. Market Risk is overseen by the
Chief Risk Officer and performs the following functions:
• Establishment of a comprehensive market risk policy framework
• Independent measurement, monitoring and control of business
segment market risk
• Definition, approval and monitoring of limits
• Performance of stress testing and qualitative risk assessments
Risk identification and classification
Market Risk works in partnership with the business segments to
identify market risks throughout the Firm and define and monitor
market risk policies and procedures. All business segments are
responsible for the comprehensive identification and verification of
market risks within their units. Risk-taking businesses have functions
that act independently from trading personnel and are responsible
for verifying risk exposures that the business takes. In addition to
providing independent oversight for market risk arising from the
business segments, Market Risk is also responsible for identifying
exposures which may not be large within individual business seg-
ments but which may be large for the Firm in the aggregate. Regular
meetings are held between Market Risk and the heads of risk-taking
businesses to discuss and decide on risk exposures in the context of
the market environment and client flows.
Positions that expose the Firm to market risk can be classified into
two categories: trading and nontrading risk. Trading risk includes posi-
tions that are held by the Firm as part of a business segment or unit,
the main business strategy of which is to trade or make markets.
Unrealized gains and losses in these positions are generally reported
in principal transactions revenue. Nontrading risk includes securities
and other assets held for longer-term investment, mortgage servicing
rights, and securities and derivatives used to manage the Firm’s
asset/liability exposures. Unrealized gains and losses in these posi-
tions are generally not reported in principal transactions revenue.
Provision for credit losses
The managed provision for credit losses includes amounts related to credit card securitizations. For the year ended December 31, 2008, the
increase in the provision for credit losses was due to year-over-year increase in the allowance for credit losses largely related to the home equity,
subprime mortgage, prime mortgage and credit card loan portfolios in the consumer businesses as well as in the allowance for credit losses related
to the wholesale portfolio. The increase in the allowance for credit losses related to the wholesale provision for loan losses from the prior year
was due to the weakening credit environment, loan growth and the transfer of $4.9 billion of funded and unfunded leveraged lending commit-
ments to retained loans from held-for-sale. The decrease in provision for lending-related commitments from the prior year benefited from reduced
balances of lending-related commitments.
Provision for
Year ended December 31, Provision for loan losses lending-related commitments Total provision for credit losses
(in millions) 2008 2007 2006 2008 2007 2006 2008 2007 2006
Investment Bank $ 2,216 $ 376 $ 112 $ (201) $ 278 $ 79 $ 2,015 $ 654 $ 191
Commercial Banking 505 230 133 (41) 49 27 464 279 160
Treasury & Securities Services 52 11 (1) 30 8—82 19 (1)
Asset Management 87 (19) (30) (2) 1285 (18) (28)
Corporate/Private Equity(a)(b) 676 — (1) 5——681 — (1)
Total Wholesale 3,536 598 213 (209) 336 108 3,327 934 321
Retail Financial Services 9,906 2,620 552 (1) (10) 9 9,905 2,610 561
Card Services – reported 6,456 3,331 2,388 —— — 6,456 3,331 2,388
Corporate/Private Equity(a)(c)(d) 1,339 (11) — (48) ——1,291 (11) —
Total Consumer 17,701 5,940 2,940 (49) (10) 9 17,652 5,930 2,949
Total provision for credit
losses – reported 21,237 6,538 3,153 (258) 326 117 20,979 6,864 3,270
Credit card – securitized 3,612 2,380 2,210 ———3,612 2,380 2,210
Total provision for credit
losses – managed $ 24,849 $ 8,918 $ 5,363 $ (258) $ 326 $117 $ 24,591 $ 9,244 $ 5,480
(a) Includes accounting conformity provisions related to the Washington Mutual transaction in 2008.
(b) Includes provision expense related to loans acquired in the Bear Stearns merger in the second quarter of 2008.
(c) Includes amounts related to held-for-investment prime mortgages transferred from AM to the Corporate/Private Equity segment.
(d) In November 2008, the Firm transferred $5.8 billion of higher quality credit card loans from the legacy Chase portfolio to a securitization trust previously established by Washington
Mutual (“the Trust”). As a result of converting higher credit quality Chase-originated on-book receivables to the Trust's seller's interest which has a higher overall loss rate reflective of
the total assets within the Trust, approximately $400 million of incremental provision expense was recorded during the fourth quarter. This incremental provision expense was recorded
in the Corporate segment as the action related to the acquisition of Washington Mutual's banking operations. For further discussion of credit card securitizations, see Note 16 on
pages 180–188 of this Annual Report.