JP Morgan Chase 2015 Annual Report Download - page 123

JPMorgan Chase & Co./2015 Annual Report 113
the borrower and takes into consideration collateral and
structural support for each credit facility. The probability of
default is estimated for each borrower, and a loss given
default is estimated for each credit facility. The calculations
and assumptions are based on historic experience and
management judgment and are reviewed regularly.
Stress testing
Stress testing is important in measuring and managing
credit risk in the Firm’s credit portfolio. The process
assesses the potential impact of alternative economic and
business scenarios on estimated credit losses for the Firm.
Economic scenarios, and the parameters underlying those
scenarios, are defined centrally, are articulated in terms of
macroeconomic factors, and applied across the businesses.
The stress test results may indicate credit migration,
changes in delinquency trends and potential losses in the
credit portfolio. In addition to the periodic stress testing
processes, management also considers additional stresses
outside these scenarios, including industry and country-
specific stress scenarios, as necessary. The Firm uses stress
testing to inform decisions on setting risk appetite both at a
Firm and LOB level, as well as to assess the impact of stress
on individual counterparties.
Risk monitoring and management
The Firm has developed policies and practices that are
designed to preserve the independence and integrity of the
approval and decision-making process of extending credit 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, concentration limits,
risk-rating methodologies, portfolio review parameters and
guidelines for management of distressed exposures. In
addition, certain models, assumptions and inputs used in
evaluating and monitoring credit risk are independently
validated by groups that are separate from the line of
businesses.
For consumer credit risk, delinquency and other trends,
including any concentrations at the portfolio level, are
monitored, as certain of these trends can be modified
through changes in underwriting policies and portfolio
guidelines. Consumer Risk Management evaluates
delinquency and other trends against business
expectations, current and forecasted economic conditions,
and industry benchmarks. Historical and forecasted trends
are incorporated into the modeling of estimated consumer
credit losses and are part of the monitoring of the credit
risk profile of the portfolio. For further discussion of
consumer loans, see Note 14.
Wholesale credit risk is monitored regularly at an aggregate
portfolio, industry, and individual client and counterparty
level with established concentration limits that are reviewed
and revised as deemed appropriate by management,
typically on an annual basis. Industry and counterparty
limits, as measured in terms of exposure and economic risk
appetite, are subject to stress-based loss constraints. In
addition, wrong-way risk — the risk that exposure to a
counterparty is positively correlated with the impact of a
default by the same counterparty, which could cause
exposure to increase at the same time as the counterparty’s
capacity to meet its obligations is decreasing — is actively
monitored as this risk could result in greater exposure at
default compared with a transaction with another
counterparty that does not have this risk.
Management of the Firm’s wholesale credit risk exposure is
accomplished through a number of means, including:
• Loan underwriting and credit approval process
• Loan syndications and participations
• Loan sales and securitizations
• Credit derivatives
• Master netting agreements
• Collateral and other risk-reduction techniques
In addition to Credit Risk Management, Internal Audit
performs periodic exams, as well as continuous reviews,
where appropriate, of the Firm’s consumer and wholesale
portfolios. For risk-rated portfolios, a Credit Review group
within Internal Audit is responsible for:
• Independently assessing and validating the changing risk
grades assigned to exposures; and
• Evaluating the effectiveness of business units’ risk
ratings, including the accuracy and consistency of risk
grades, the timeliness of risk grade changes and the
justification of risk grades in credit memoranda.
Risk reporting
To enable monitoring of credit risk and effective decision-
making, aggregate credit exposure, credit quality forecasts,
concentration levels and risk profile changes are reported
regularly to senior members of 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, risk committees, senior
management and the Board of Directors as appropriate.