JP Morgan Chase 2015 Annual Report Download - page 19

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Unfortunately, some of the final rules around
capital are still not fully known at this time.
There are still several new rules coming that
also could impact our company – probably
the most important to us is how the GSIB
capital surcharge is incorporated into the
CCAR stress test. To date, we have managed
to what we do know. We believe that when
the final rules are made and known, we can
adjust to them in an appropriate way.
As banks change their business models to
adapt to the new world, some are exiting
certain products or regions. Market shares
will change, and both products and product
pricing will change over time. Therefore, we
think there will be a lot of adjustments to
make and tools to deploy so that we can still
serve our clients and earn a fair profit.
We operate in more than 100 countries
across the globe – and we are constantly
analyzing the geopolitical and country risks
that we face. The reason we operate in all
these countries is not simply because they
represent new markets where we can sell
our products. When we operate in a country,
we serve not only local institutions (govern-
ments and sovereign institutions, banks and
corporations in that country) but also some
of those institutions and corporations outside
their country, along with multinationals
when they enter that country. This creates
a huge network eect. In all the countries
where we operate, approximately 40% of the
business is indigenous, 30% is outbound and
30% is inbound. All these institutions need
financing and advice (M&A, equity, debt and
loans), risk management (foreign exchange
and interest rates) and asset management
services (financial planning and investment
management), as well as operating services
(custody and cash management) in their
own countries and globally. It takes decades
to build these capabilities and relationships
– we cannot go in and out of a country on a
whim, based on a short-term feeling about
risk in that country. Therefore, we need plans
for the long term while carefully managing
current risk.
We carefully monitor risks — country by country.
For each country, we take a long-term view
of its growth potential across all our lines
of business. Each country is dierent, but,
for the most part, emerging and developing
markets will grow faster than developed
countries. And as they grow, the need for
our services grows dramatically. While we
have a future growth plan for each country,
we obviously can’t know with any certainty
everything that will happen or the timing
of recessions. No matter what the future
brings, we make sure that we can easily
bear the losses if we are wrong in our
assessments. For each material country,
we look at what our losses would be under
severe stress (not that dierent from the
Fed’s CCAR stress test). We manage so
that should the extreme situation occur,
we might lose money, but we could easily
handle the result. Below are a few examples
of how we manage risk while continuing to
serve clients in specific countries.
China. We believe it likely that, in 20–25 years,
China will be a developed nation, probably
housing 25% or more of the top 3,000 compa-
nies globally. Going forward, we do not expect
China to enjoy the smooth, steady growth it
has had over the past 20 years. Reforming
inecient state-owned enterprises, developing
healthy markets (like we have in the United
States) with full transparency and creating a
convertible currency where capital can move
freely will not be easy. There will be many
bumps in the road. We publicly disclose in
our Form 10-K that we have approximately
$19 billion of country exposure to China. We
run China through a severe stress test (essen-
tially, a major recession with massive defaults
and trading losses), and we estimate that our
losses in this scenario could be approximately
$4 billion. We do not expect this situation to
How do you manage geopolitical and country risks?