JP Morgan Chase 2010 Annual Report Download - page 117

JPMorgan Chase & Co./2010 Annual Report 117
Credit-scored exposure
For credit-scored portfolios (generally held in RFS and CS), probable
loss is based on a statistical analysis of inherent losses expected to
emerge over discrete periods of time for each portfolio. The credit-
scored portfolio includes mortgage, home equity, certain business
banking and auto loans, student loans, as well as credit card loans.
Probable losses inherent in the portfolio are estimated using sophisti-
cated portfolio modeling, credit scoring and decision-support tools,
which take into account factors such as delinquency, geography, LTV
ratios and credit scores. These analyses are applied to the Firm’s
current portfolios in order to estimate the severity of losses, which
determines the amount of probable losses. Other risk characteristics
utilized to evaluate probable losses include recent loss experience in
the portfolios, changes in origination sources, portfolio seasoning,
potential borrower behavior and the macroeconomic environment.
These factors and analyses are updated at least on a quarterly basis
or more frequently as market conditions dictate.
Risk monitoring and control
The Firm has developed policies and practices that are designed to
preserve the independence and integrity of the approval and deci-
sion-making process of extending credit and to ensure credit risks
are assessed accurately, approved properly, monitored regularly
and managed actively at both the transaction and portfolio levels.
The policy framework establishes credit approval authorities, con-
centration limits, risk-rating methodologies, portfolio review pa-
rameters and guidelines for management of distressed exposure.
For consumer credit risk, delinquency and other trends, including
any concentrations at the portfolio level, are monitored for poten-
tial problems, as certain of these trends can be ameliorated through
changes in underwriting policies and portfolio guidelines. Con-
sumer Credit Risk Management evaluates delinquency and other
trends against business expectations, current and forecasted eco-
nomic conditions, and industry benchmarks. All of these historical
and forecasted trends are incorporated into the modeling of esti-
mated consumer credit losses and are part of the monitoring of the
credit risk profile of the portfolio.
Wholesale credit risk is monitored regularly at an aggregate portfo-
lio, industry and individual counterparty basis with established
concentration limits that are reviewed and revised, as deemed
appropriate by management, on an annual basis. Industry and
counterparty limits, as measured in terms of exposure and eco-
nomic credit risk capital, are subject to stress-based loss constraints
for the aggregate portfolio.
Management of the Firm’s wholesale exposure is accomplished
through a number of means including:
• Loan syndication and participations
• Loan sales and securitizations
• Credit derivatives
• Use of master netting agreements
• Collateral and other risk-reduction techniques
In addition to Risk Management, the Firm’s Audit department
provides periodic reviews, as well as continuous monitoring, where
appropriate, of the Firm’s consumer and wholesale portfolios.
In the Firm’s wholesale and certain risk-rated consumer credit
portfolios, a credit review group within the Audit department is
responsible for:
• Independently assessing and validating the changing risk grades
assigned to exposures; and
• Evaluating the effectiveness of business units’ risk rating, includ-
ing the accuracy and consistency of risk grades, the timeliness of
risk grade changes and the justification of risk grades in credit
memoranda
In the Firm’s consumer credit portfolio, the Audit department
periodically tests the internal controls around the modeling process
including the integrity of the data utilized. In addition, the risk
inherent in the Firm’s consumer based loans is evaluated using
models whose construction, assumptions and on-going perform-
ance relative to expectations are reviewed by an independent risk
management group that is separate from the lines of business. For
further discussion on consumer loans, see Note 14 on pages 220–
238 of this Annual Report.
Risk reporting
To enable monitoring of credit risk and decision-making, aggregate
credit exposure, credit quality forecasts, concentration levels and
risk profile changes are reported regularly to senior Credit Risk
Management. Detailed portfolio reporting of industry, customer,
product and geographic concentrations occurs monthly, and the
appropriateness of the allowance for credit losses is reviewed by
senior management at least on a quarterly basis. Through the risk
reporting and governance structure, credit risk trends and limit
exceptions are provided regularly to, and discussed with, senior
management. For further discussion of risk monitoring and control,
see page 109 of this Annual Report.