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JPMORGAN CHASE & CO.

ANALYSIS Financial Markets and Institutions (FIN 320-01)

Final Project

Wyatt A. Chartrand

Rita Redko

Steve Celeste

Abdulkadir Askar

Fall 2015

Chartrand, Redko, Celeste, and Askar 1

Introduction:

As one of the oldest and largest financial institutions in the world, JPMorgan Chase &

Co. (JPM) serves millions of consumers around the world. Headquartered in New York City and

operating primarily in the United States, JPMorgan Chase also services some of the world’s most

prominent corporate, institutional, and government clients. Throughout its history, JPMorgan

Chase and its predecessors have been serial acquirers, merging with peers and competitive firms

to reach the global scale of what is now the largest bank in the United States, and the world's

sixth largest bank by total assets. JPMorgan Chase was established as the result of the

combination of several large U.S. banking companies in 1996 and prior, including Chase

Manhattan Bank, J.P. Morgan & Co., Bank One, Bear Stearns and Washington Mutual. The

company and name JPMorgan Chase was formalized in 2000 (JPMorgan Chase). JPMorgan

Chase has integrated these acquisitions into their model as an integrated universal bank, the

result of which has been a full-service portfolio of banking products and services available to a

variety of clients. As we look at JPMorgan Chase, we see four main business segments of the

firm that operate and offer a wide variety of financial services to a comprehensive range of

clients around the globe. As a large multinational bank, JPMorgan Chase is faced with different

types of risks. We look at not only how these risks are measured, but also how JPMorgan Chase

typically protects itself from them. Given the history of fraudulent cases and illegal acts by

similar firms, we will also be looking at a number of institutions, both foreign and domestic, that

oversee and regulate JPMorgan Chase and its subsidiary firms (JPMorgan Chase).


Business Segments:

On a broad scale, JPMorgan Chase has four operating segments—consumer and

community banking, corporate and investment banking, commercial banking, and asset

management. The largest of the four, contributing 46% to the company's total revenues, is

consumer and community banking, with corporate and investment banking coming in second

with 34% in revenues. Asset management and commercial banking contribute 12% and 7%

respectively (King, 2015). In 2012 JPMorgan Chase chase took a substantial step forward by

combining Chase’s three key retail businesses: consumer and business banking, mortgage

banking, and Card, merchant services and auto finance into one franchise—consumer and

community banking. This branch serves consumers and businesses through personal service

such as ATMs, online, mobile, and telephone banking. Consumer and Business

Banking provides deposit and investment products and services to consumers and small

businesses are offered lending, deposit, and cash management. Within credit card services,

credit cards are issued to consumers and small businesses to provide payment services to the

corporate and public sector. This subsection also offers clients auto and student loan

services. Lastly, mortgage banking includes mortgage orientation and portfolios made up of

residential mortgages and home equity loans (Annual Report 2014).

Another key segment of JPMorgan Chase is its corporate and investment banking

sector. Here the firm strives to deliver strategic advice and solutions including raising capital,

risk management and underwriting. This segment is broken up into two main

components: banking services and markets and investor services. The first offers a full range of

investment banking products including raising capital in equity and debt markets as well as loan

origination. This service also includes treasury services, which is composed of transaction


services dealing with cash management and liquidity solutions. On the other hand, the markets

and investors services segment is a global market maker offering myriad risk management

solutions, and also includes the securities services business which oversees the lending products

that are sold to investment funds and insurance companies (Annual Report 2014).

When it comes to commercial banking the company aims to deliver extensive industry

knowledge, local expertise, and dedicated service to both U.S and international clients. Overall,

the firm provides comprehensive financial solutions that deal with lending, investment banking,

and asset management (Annual Report 2014). This segment is further divided into four primary

client segments: middle market banking (covering corporate, municipal, and nonprofit clients,

with annual revenue generally ranging from between $20 million and $500 million), corporate

client banking (covering clients with annual revenue generally ranging from between $500

million to $2 billion and focuses on clients that have broader investment banking needs),

commercial term lending (providing term financing to real estate investors), and real estate

banking (providing full-service banking to investors and developers). This segment seeks to

further differentiate the company’s service and capabilities to continue to improve in the future

by increasing the client base and building deeper client relationships (Annual Report 2014).

The asset management division offers investment management across all major

asset classes, including equities, fixed income securities, multi-asset solutions, and alternative

investments (See Appendix Graphic 1). While there are a variety of clients, the majority of asset

management client assets are in actively managed portfolios (Annual Report 2014). There are

two distinct lines of service within asset management—global investment management, which

provides investment services on a global scale like active risk-budgeting strategies. The second

is global wealth management that focuses on investment advice and investment management as


well as specialty wealth advisory services. JP Morgan Chase prides themselves on the unique

combination of the two (See Appendix Graphic 2). Furthermore, the client segments within

asset management can be broken down into private banking, including high and ultra-high net

worth individuals, institutional, including corporate and public institutions, and finally retail

clients which are composed of financial intermediaries and individual investors.

These business segments have a global footprint comparable in scale to JPMorgan

Chase’s largest institutional clients and the geographic diversity of their smallest retail

clients. The firm operates in more than 60 countries with a primary focus in North

American. However, given JPMorgan Chase’s size, the scale of operations in each smaller

foreign market remains large. In 2014, JPMorgan Chase recorded more than $34 billion in

revenue, 50% of which was acquired from consumers and clients outside of the United

States. Of this $17 billion in international revenue, 66% was derived from the EMEA region

(Europe, Middle East, and Africa), representing a market where JPMorgan Chase’s business is

mature and well-known. 27% was generated from the Asian region and the last 7% came from

the Latin American region, a place where management perceives their ability to grow and

develop the JPMorgan Chase brand may be the greatest (Annual Report 2014). Most revenues

from international markets are being generated through the corporate and investment banking

and asset management business segments of JPMorgan Chase.

Risk Management:

JP Morgan’s total assets and total liabilities both increased from December 31, 2013 by

157.4 billion and 136.6 billion, respectively. The assets for the period ending December, 2014

totaled $2,573,126 (See Appendix Graphic 4). These assets included cash and fees from banks

and deposits with banks, federal funds sold, and securities purchased under resale agreements.


Cash items on a bank’s balance sheet generally are composed of reserves, cash items in process

of collection, and deposits at other banks (Mishkin 402). Assets also included are trading assets,

which were driven by client market making activities in corporate and investment banking.

Additionally, securities made up a big chunk at $348,004, and these are generally made up of

debt instruments because banks are not allowed to hold stock (Mishkin 402). Other assets that

played a role in JPMorgan Chase’s bank statements were loans and allowance for loan

losses. These are a reflection of probable credit losses that arise in the consumer and wholesale

loan portfolios. These losses are estimated using statistical analyses. Moreover, accrued interest

in accounts receivables was a direct result of market making activities and security sales.

Additionally, there are other assets listed that can be the result of physical capital as well as

private equity investments due to sales (Annual Report 2014).

The liabilities can also be broken down further (See Appendix Graphic 3). Deposits

made up the majority of liabilities at $1,363,427, and are comprised of consumer and wholesale

deposits driven by client activity and growth. Another large liability on JPMorgan’s balance

sheet is federal funds purchased and securities loaned or sold under repurchase agreements. This

liability is attributable to higher financing of the firm’s trading of debt and equity

instruments. Commercial paper is also a liability for the institution. The increase in the issuance

of commercial paper can be attributed to short-term funding plans which consist primarily of

securities loaned or sold under repurchase agreements. Another liability, accounts payable, can

increase due to both client short positions as well as security purchases that did not settle, and the

final component was long-term debt. This debt is a result of long term funding, the majority of

which is issued by the parent holding company to provide flexibility and additional liquidity for


the firm. Long term funding objectives include maximizing market access and optimizing

funding costs (Annual Report 2014).

JPMorgan Chase, like most major banks and financial institutions, faces eight main types

of risk. These risks are credit risk, market risk, operational risk, liquidity risk, reputational risk,

business risk, systemic risk, and moral hazard risk. The first three risks are the major ones, with

the following three also being important. The last two are generally unrelated to JPMorgan

Chase’s everyday operations, but nevertheless warrant consideration, as they can still affect their

bottom line. According to the website Market Realist “The Basel Committee on Banking

Supervision (or BCBS) defines credit risk as the potential that a bank borrower, or counterparty,

will fail to meet its payment obligations regarding the terms agreed with the bank.” (Market

Realist, 2014) This type of risk is measured by credit scoring, credit analysis, stress testing

(Annual Report 2014), and through the use of credit ratings through rating services companies

such as Standard and Poor’s via letter grades from AAA to D. For market risk, the website

Market Realist states “The Basel Committee on Banking Supervision defines market risk as the

risk of losses in on- or off-balance sheet positions that arise from movement in market

prices.” Because JPMorgan Chase is heavily involved in investment banking, this is of particular

concern to them. There are many ways to measure market risk, including gap analysis, duration

analysis, scenario analysis, portfolio theory, and derivatives risk measures such as delta, gamma,

vomma, zomma, et cetera.

Operational risk includes any risk of loss due to some failure of internal processes, which

may include legal risk. Managerial, information technology and process-related risks are also all

forms of operational risk. In measuring operational risks, JPMorgan Chase uses statistical

measurements, scenario-based approaches, and scorecard approaches, in addition to “value at


risk” (VaR). Any institution’s liquidity risk refers to the risk of not having enough cash on hand

to meet its day-to-day obligations and expenses. This kind of risk can sometimes lead to a bank

run. Measuring liquidity risk (particularly funding liquidity risk) involves normalizing bank bids

and constructing an aggregate proxy of funding liquidity risk by summing across the adjusted

bids of all banks. Reputational risk is any risk arising from the image of the bank in the eyes of

consumers resulting from any action taken by the bank. This can lead to a loss of confidence in

the bank from the public. JPMorgan’s reputational risk can be measured by examining a bank’s

stock price reaction or sales of its products and services when the bank takes some action that

negatively impacts the public’s perception of it, as well as through market surveys. A bank’s

business risk relates to risks incurred from the bank’s long-term strategies, or the tradeoffs it

makes to remain competitive. This pertains mainly to a bank choosing a faulty strategy. The

measurements a bank can use to measure business risk include the contribution margin ratio, the

operation leverage effect, the financial leverage effect, and the total leverage effect. A bank’s

systemic risk refers to the probability that the entire financial industry could be disrupted

negatively. It is the risk the entire industry and market faces. Some of the measures used to

measure systemic risk include illiquidity and correlation, principal components analysis, regime-

switching models, and granger causality tests. Referring again to the website Market Realist, a

moral hazard risk “…refers to a situation where a person, a group (or persons), or an

organization is likely to have a tendency or a willingness to take a high-level risk, even if it’s

economically unsound. The reasoning is that the person, group, or organization knows that the

costs of such risk-taking, if it materializes, won’t be borne by the person, group, or organization

taking the risk.” Price elasticities of demand can be used (as an economic measure) to provide

quantitative information regarding moral hazards risk.


The main ways in which a bank can protect itself from each of these risk factors is listed

below in respective order:

1. Credit Risk—Creating provisions at the time of disbursing the loan, and making an

acquisition of a business they immediately raise capital in common equity to protect capital

position (Annual Report 2014).

2. Market Risk—Asset allocation or diversification. In the case of JPMorgan Chase, limits

are set according to market risk and are regularly updated and approved by business segments

and senior management (Annual Report 2014).

3. Operational Risk—Putting system and managerial controls in place and tracking key risk

indicators (KRIs). JPMorgan Chase has its Firmwide Control Committee (FCC) that reviews

and discusses firmwide operational risk and risk metrics (Annual Report 2014).

4. Liquidity Risk- JPMorgan has a Liquidity Risk Oversight Group which provides

independent assessments, measurements, and control of liquidity risk. They can also borrow

from the Central Bank

5. Reputational Risk—Bank advertisements, branding, and regulatory compliance and

transparency.

6. Business Risk—Avoiding fast-growth strategies, maintaining managerial competence,

hiring consultants. Specifically JPMorgan has a number of business risk committees that deal

with this (Annual Report 2014).

7. Systemic Risk—Maintaining capital and liquidity, instituting more resilient market

structures, and maintaining supervisory practices. They are also performing ongoing analyses

regarding this type of risk.

8. Moral Hazard Risk—Offering incentives, implementing policies to prevent immoral

behavior, and regular monitoring.

Regulation:

JPMorgan Chase is a financial holding company. As such, there are other companies

operating under JPMorgan Chase. The main banking subsidiaries of JPMorgan Chase are

JPMorgan Chase Bank (N.A. - National Association) and Chase Bank USA (N.A.). The

principle non-banking subsidiary is JP Morgan Securities LLC, which is the investment bank of

the firm in the U.S. The firm also has an asset management unit. (see Graphic 5 in the Appendix

for the organizational framework) Because each subsidy conducts a different operation, there

are different regulations concerning the subsidiaries of JPMorgan Chase. The firm is regulated

for its commercial banking activities, investment banking activities, and investment management


activities. For the commercial banking activities there are three major regulators supervising the

firm’s activities. These regulators are the Federal Reserve Bank, the Office of the Comptroller

of The Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). The Federal

Reserve Bank is an umbrella regulator, which means that it has authority over the entire

company. This right was given to The Federal Reserve System by the Dodd-Frank Act, which

was passed by the U.S. Congress in 2010, to increase the regulation on the financial sector after

the fınancial crisis. The Office of the Comptroller of The Currency (OCC) is responsible for the

soundness of the banking system. It also ensures equal access to financial services to all

Americans. (OCC) Moreover, the Office of the Comptroller of The Currency is responsible for

the protection of the banking system from money laundering and other finance-related

crime. The Office of the Comptroller of The Currency is controlled by the Treasury of the U.S.

Federal Deposit Insurance Corporation, which is also a government agency, and is another

regulator that provides insurance for bank accounts in member banks. Each depositor is protected

for up to $250,000 for each account ownership categories of checking accounts, savings

accounts, money market deposit accounts, and certificates of deposit by the Federal Deposit

Insurance Corporation. However, providing this insurance brings some extra regulation to

JPMorgan Chase. The firm needs to report to the Federal Deposit Insurance Corporation

regularly as well as fulfill some requirements to maintain transparency. The investment bank is

under the regulation for its operations as a broker/dealer. The Securities and Exchange

Commission regulates investment banking operations. The Securities and Exchange

Commission regulates the investment banking subsidiary of JPMorgan Chase in regards to

licensing, accounting, compensation, reporting, filing, advertising, product offerings, and

fiduciary responsibilities (Securities and Exchange). Additionally, certain futures- and swap-


related activities are regulated by the Commodity Futures Trading Commission - CFTC. The

asset management activities of JPMorgan Chase are regulated through the Volcker Rule that is

under the Dodd-Frank Act. According to the Volcker Rule, a firm cannot engage in proprietary

trading activities except for underwriting, market making and risk mitigation. The firm is also

regulated for its derivatives trading under the Dodd-Frank Act. The banking activities of the

firm are regulated according to Basel III Regulations. These regulations cover capital

requirements and assets and liabilities management (Hummel 2015). The capital requirements

consist of Tier 1, Tier 2. Tier 1 refers to the bank’s own equity (common stock and retained

earnings) and, according to Basel III, the Tier 1 capital ratio (Tier 1 capital relative to the total

risk-weighted assets) should be at least 6% (Bank of International). Tier 2 consists of the

supplementary capital of the bank including revaluation reserves, undisclosed reserves, hybrid

instruments, and subordinated term debt Tier 2) The capital adequacy ratio (Tier 1 capital and

Tier 2 capital relative to the total risk-weighted assets) must be at least 8% (Bank For

International). The capital conservation buffer (the additional capital the bank should hold

relative to its risk-weighted assets) will go into effect in 2016 and it increases gradually each

year until 2019 when the minimum capital conservation buffer must be at least 2.5% (Bank For

International). Beginning in 2019 the capital adequacy ratio along with the capital conservation

ratio must be at least 10.5%. Additional capital ratios can be found in the appendix. The assets

and liabilities management includes the liquidity coverage ratio and the net stable funding

ratio. Banks must hold highly liquid assets, such as treasury bonds, that cover their net cash

outflows for at least 30 days to comply with the liquidity coverage ratio (Basel 3 for

Dummies). The net stable funding ratio states that a bank’s long-term (longer than 1 year) assets

must exceed the longer term commitments. These commitments include the risks assigned to the


assets and the off-balance sheet liquidity exposures. This ratio aims to promote medium-term

and long-term funding for the banks.


Works Cited

“Bank For International Settlements.” N.p., n.d. Web. 2 Dec. 2015.

http://www.bis.org/bcbs/basel3.htm>.

“Basel III for Dummies!” Treasury Peer. N.p., n.d. Web. 2 Dec. 2015.

http://treasurypeer.com/dummies-2/basel-3-for-dummies/>

Erdoes, Mary. Asset Management . N.p., 25 Feb. 2014. Web. 2 Dec. 2015

http://files.shareholder.com/downloads/ONE/0x0x728429/2E580C70-568D- 44D1-

AF09- 8AF381005AF9/AM_Investor_Day_2014_FINAL.pdf>.

Hummel, Jeffrey R. "Reserve Requirements Basel Style: The Liquidity Coverage Ratio." CATO.

N.p., 31 July 2015. Web. 2 Dec. 2015. <http://www.cato.org/blog/reserve- requirements-

basel-style-liquidity-coverage-ratio>.

JPMorgan Chase & CO. “Annual Report 2014.” Web. Nov. 30 2015.

http://files.shareholder.com/downloads/ONE/1106868522x0x820066/f831cad9-

f0d8-4efc-9b68-f18ea184a1e8/JPMC-2014-AnnualReport.pdf

JPMorgan Chase & CO. JPMorgan Chase, 2015. Web. 2 Dec. 2015

https://careers.jpmorganchase.com/career/jpmc/careers/lob>.

"JP Morgan Chase." Wikipedia. N.p., 28 Nov. 2015. Web. 2 Dec. 2015.

https://en.wikipedia.org/wiki/JPMorgan_Chase#History.

King, Ruth. JP Mprgan's 4 Operating Segments. N.p., 16 Mar. 2015. Web. 2 Dec. 2015.

http://finance.yahoo.com/news/jp-morgan-4-operating-segments-200632046.html>.


Mishkin, Frederic S., and Stanley G.Eakins. Financial Markets and Institutions. Boston:

Prentice Hall, 2012. Print.

Nickolas, Steven. "How can I calculate the tier 1 capital ratio?" Investopedia. N.p., n.d. Web. 2

Dec. 2015. <http://www.investopedia.com/ask/answers/043015/how-can- i-calculate-

tier-1-capital-ratio.asp>.

Nicholas, Steven. "What is the minimum capital adequacy ratio that must be attained under

Basel III?" Investopedia. N.p., n.d. Web. 2 Dec. 2015.

http://www.investopedia.com/ask/answers/062515/what-minimum-capital-

adequacy-ratio-must-be-attained-under-basel-iii.asp>.

Perez, Saul. "Must Know: understanding credit risk in the banking business ." Market

Realist . N.p., Sept. 2014. Web. 4 Dec. 2015.

http://marketrealist.com/2014/09/must-know-understanding-credit-risk-banking-

business/

“Understanding Deposit Insurance.” Federal Deposit Insurance Corporation. N.p., n.d. Web. 2

Dec. 2015. <https://www.fdic.gov/deposit/deposits/>.

“Tier 2 Capital.” Investopedia. N.p., n.d. Web. 2 Dec. 2015.

http://www.investopedia.com/terms/t/tier2capital.asp>

Appendix:

Graphic 1

Graphic 2

Graphic 3

Graphic 4

Graphic 5

JPMorgan Chase & Co. AnalysisRita Redko

Wyatt A. Chartrand

Steven Celeste

Abdulkadir Askar

Introduction and History

Business Segments

Risks

Regulations

JPM is one of the oldest and largest financial

institutions in the world.

Headquartered in New York City.

Provides financial products and services to some of the

world’s most prominent institutions.

James Dimon – chairman, president, and CEO.

Established in 1799 – Aaron Burr

JPMorgan Chase considered a serial acquirer, merging with peers and competitive

firms throughout it’s history.

Bank One

Bear Stearns

Washington Mutual

Company was officially formed in 2000, when Chase Manhattan Corp. merged

with J.P. Morgan & Co.

Consumer and Community Banking

Asset Management

Corporate and Investment Banking

Commercial Banking

Consumer and business banking- consumer banking, business banking, and chase

wealth management

Mortgage banking – mortgage production, mortgage

servicing, and real estate portfolios

Credit card merchant services and Auto – credit card ,

merchant services

This branch serves consumers and business through personal

service at bank branches, through ATMs, online, and

telephone banking.

Consumer and Community

Banking

Second largest issuer of credit cards and largest merchant acquirer--155 million cards in circulation and $57 billion in

managed loans

Customers use cards for more than $281 billion worth of purchases a year- this

translates to about 97 Chase card transactions per second.

Cards reflect partnerships with major airlines, hotels, universities and other

financial institutions.

Examples of credit cards by category:

--Business credit cards

--Cash back credit cards

--Chip-enabled credit cards

--No foreign transaction fee credit cards

Card Services

Offers investment management across all major classes including

equities, fixed income, alternatives, and multi asset solutions.

Client Segments

1. Private banking

2. Institutional

3. Retail

One of the largest asset and wealth managers in world

Assets under supervisions- $1.6 trillion

Assets under management $1.2 trillion

Two lines of business:

1. Global investment management

2. Global wealth management

Asset Management

Offers investment banking, market making, prime brokerage and treasury and securities products and services to global client base of corporations, financial institutions and governments.

1. Banking Services- advising on corporate strategy and structure

• Also includes Treasury Services comprised of cash management and liquidity solutions.

2. Markets and Investor Services – global market maker in cash securities

• Also includes Securities Services business- a leading global custodian

Equity Capital Markets

The firms underwriting activities include:

IPO’s

Follow-on Common Stock Issues

Convertible Issues

Private Placements

Corporate and Investment Banking

Delivers industry knowledge, local expertise and dedicated

service to U.S and multinational clients.

Client Segments

1. Middle Market Banking

2. Corporate Client Banking

3. Commercial Term Lending

4. Real Estate Banking

Product segments

1. Asset based lending

2. Leasing

This segment relies heavily on a local presence.

Commercial Banking

In 2014, JPM recorded more than $34 billion in

revenue, 50% acquired from consumers and clients

outside the U.S.

The majority of international revenues come from the

Commercial Banking, and Asset Management

segments.

66%

27%

7%

% International Revenues - 2014

Europe, Middle East,

Africa

Asia/Pacific

Latin America

Assets

Liabilities

Primary Risks

--Credit Risk

--Market Risk

--Operational Risk

Secondary Risks

--Liquidity Risk

--Reputational Risk

--Business Risk

Unrelated Risks

--Systemic Risk

--Moral Hazard Risk

• Credit analysis, credit ratings, and credit scoring.

• Gap analysis, duration analysis, scenario analysis, portfolio theory, and derivatives risk measures.

• Statistical measurement, scenario-based approaches, scorecard approaches, and value at risk.

• Normalizing bank bids and constructing an aggregate proxy of funding liquidity risk by summing across the adjusted bids of all banks.

• Examining a bank’s stock price reaction or sales of its products and services and market surveys.

• Contribution margin ratio, the operation leverage effect, the financial leverage effect, and the total leverage effect.

• Illiquidity and correlation, principal components analysis, regime-switching models, and granger causality tests.

• Price elasticities of demand can be used (as an economic measure) to provide quantitative information.

Capital Requirements

Tier 1 Capital

Tier 2 Capital

Capital Adequacy Ratio

Capital Conservation Buffer

Basel 3 Regulations

Assets and Liabilities Management

Liquidity Coverage Ratio

Net Stable Funding