JP Morgan Chase 2015 Annual Report Download - page 118

Management’s discussion and analysis
108 JPMorgan Chase & Co./2015 Annual Report
The following sections outline the key risks that are inherent in the Firm’s business activities.
Risk Definition Select risk management metrics
Page
references
Capital risk The risk the Firm has an insufficient level and composition of capital to support the
Firm’s business activities and associated risks during normal economic environments
and stressed conditions.
Risk-based capital ratios; supplementary leverage
ratio; stress
149–158
Compliance
risk
The risk of failure to comply with applicable laws, rules, and regulations. Various metrics related to market conduct, Bank
Secrecy Act/Anti-Money Laundering (“BSA/AML”),
employee compliance, fiduciary, privacy and
information risk
147
Country risk The risk that a sovereign event or action alters the value or terms of contractual
obligations of obligors, counterparties and issuers or adversely affects markets
related to a particular country.
Default exposure at 0% recovery; stress; risk
ratings; ratings based capital limits
140–141
Credit risk The risk of loss arising from the default of a customer, client or counterparty. Total exposure; industry, geographic and customer
concentrations; risk ratings; delinquencies; loss
experience; stress
112–132
Legal risk The risk of loss or imposition of damages, fines, penalties or other liability arising
from failure to comply with a contractual obligation or to comply with laws or
regulations to which the Firm is subject.
Not applicable 146
Liquidity
risk
The risk that the Firm will be unable to meet its contractual and contingent
obligations or that it does not have the appropriate amount, composition and tenor of
funding and liquidity to support its assets.
LCR; stress 159–164
Market risk The risk of loss arising from potential adverse changes in the value of the Firm’s
assets and liabilities resulting from changes in market variables such as interest rates,
foreign exchange rates, equity prices, commodity prices, implied volatilities or credit
spreads.
VaR, stress, sensitivities 133–139
Model risk The risk of the potential for adverse consequences from decisions based on incorrect
or misused model outputs and reports.
Model status, model tier 142
Non-U.S.
dollar
foreign
exchange
(“FX”) risk
The risk that changes in foreign exchange rates affect the value of the Firm’s assets or
liabilities or future results.
FX net open position (“NOP”) 139
Operational
risk
The risk of loss resulting from inadequate or failed processes or systems, human
factors, or due to external events that are neither market nor credit-related.
Firm-specific loss experience; industry loss
experience; business environment and internal
control factors (“BEICF”); key risk indicators; key
control indicators; operating metrics
144–146
Principal
risk
The risk of an adverse change in the value of privately-held financial assets and
instruments, typically representing an ownership or junior capital position that have
unique risks due to their illiquidity or for which there is less observable market or
valuation data.
Carrying value, stress 143
Reputation
risk
The risk that an action, transaction, investment or event will reduce trust in the Firm’s
integrity or competence by our various constituents, including clients, counterparties,
investors, regulators, employees and the broader public.
Not applicable 148
Structural
interest
rate risk
The risk resulting from the Firm’s traditional banking activities (both on- and off-
balance sheet positions) arising from the extension of loans and credit facilities,
taking deposits and issuing debt (collectively referred to as “non-trading activities”),
and also the impact from the CIO investment securities portfolio and other related CIO
and Treasury activities.
Earnings-at-risk 138-139
Risk appetite and governance
The Firm’s overall tolerance for risk is governed by a “Risk
Appetite” framework for measuring and monitoring risk.
The framework measures the Firm’s capacity to take risk
against stated quantitative tolerances and qualitative
factors at each of the line of business (“LOB”) levels, as well
as at the Firmwide level. The framework and tolerances are
set and approved by the Firm’s CEO, Chief Financial Officer
(“CFO”), CRO and Chief Operating Officer (“COO”). LOB-level
Risk Appetite parameters and tolerances are set by the
respective LOB CEO, CFO and CRO and are approved by the
Firm’s CEO, CFO, CRO and COO. Quantitative risk tolerances
are expressed in terms of tolerance levels for stressed net
income, market risk, credit risk, liquidity risk, structural
interest rate risk, operational risk and capital. Risk Appetite
results are reported quarterly to the Risk Policy Committee
of the Board of Directors (“DRPC”).
The Firm’s CRO is responsible for the overall direction of the
Firm’s Risk Management functions and is head of the Risk
Management Organization, reporting to the Firm’s CEO and
DRPC. The Risk Management Organization operates
independently from the revenue-generating businesses,
which enables it to provide credible challenge to the
businesses. The leadership team of the Risk Management
Organization is aligned to the various LOBs and corporate
functions as well as across the Firm for firmwide risk
categories (e.g. firmwide market risk, firmwide model risk,
firmwide reputation risk, etc.) producing a matrix structure
with specific subject matter expertise to manage risks both
within the businesses and across the Firm.
The Firm places key reliance on each of the LOBs as the first
line of defense in risk governance. The LOBs are
accountable for identifying and addressing the risks in their