JPMorgan (NYSE:JPM) is subject to multiple risks which at times may be beyond the ability of management or the board to comprehend or even for see. Here are some of the Black Swan events that they publicly declare in regulatory documents that they consider risks. Having included the risks in the boilerplate somewhere they go on with corporate communications which blithely ignores the issues. Sober long-term investors need to review these risks and come to their own determination where they stand.
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Credit Risk –
Credit risk is the risk of loss from obligor or counterparty default. The Company is
engaged in various lending and principal transactions with counterparties that include corporations,
financial institutions, governments and their agencies, pension funds, mutual funds, and hedge
funds. In addition, obligations arise from participation in payment and securities settlement
transactions on the Company’s behalf. For further discussion on credit risk related to customer
activities, please refer to Note 13 in these Notes to Consolidated Statement of Financial Condition.
2. Liquidity Risk –
Liquidity risk arises from the general funding needs of the Company’s activities and
in the management of its assets and liabilities. The ability to maintain a sufficient level of liquidity is
crucial to financial services companies, particularly their ability to maintain appropriate levels of
liquidity during periods of adverse conditions. The Company’s funding strategy is to ensure liquidity
and diversity of funding sources to meet actual and contingent liabilities through both normal and
stress periods. Through JPMorgan Chase and outside relationships, the Company seeks to
preserve stable, reliable and cost-effective sources of funding. Procedures are in place to identify,
measure, and monitor the Company’s liquidity sources and uses, which enable the Company to
manage these risks.
3. Market Risk –
Market risk is the exposure to an adverse change in the market value of portfolios
and financial instruments caused by a change in market prices or rates. Market risk is identified,
measured, monitored, and controlled by JPMorgan Chase’s Market Risk function, a corporate risk
governance function independent of the lines of business. Market risk is overseen by JPMorgan
Chase’s Chief Risk Officer. Market risk is controlled primarily through a series of limits set in the
context of the market environment and business strategy.
4. Operational Risk –
Operational risk is the risk of loss resulting from inadequate or failed processes
or systems, human factors, or external events. Operational risk is inherent in the Company’s
business activities and can manifest itself in various ways, including errors, fraudulent acts,
business interruptions, inappropriate behavior of employees, or vendors that do not perform in
accordance with their arrangements. These events could result in financial losses and other
damage to the Company, including reputational harm. To monitor and control operational risk, the
Company (through JPMorgan Chase) maintains a system of comprehensive policies and a control
framework designed to provide a sound and well-controlled operational environment. The goal is to
keep operational risk at appropriate levels, in light of the Company’s financial strength, the
characteristics of its businesses, the markets in which it operates, and the competitive and
regulatory environment to which it is subject.
5. Legal Risk –
Legal risk is the risk of loss arising from the uncertainty of the enforceability, through
legal and judicial processes, of the obligations of the Company’s clients and counterparties,
including contractual provisions intended to reduce credit exposure by providing for the offsetting
and netting of mutual obligations. Legal risk also encompasses the risk of loss attributable to
deficiencies in the documentation of transactions (e.g., trade confirmations) and of regulatory
compliance risk, which is the risk of loss due to the Company’s violations of, or non-conformance
with, laws, rules, regulations and prescribed practices in the normal course of conducting its
business and activities. Finally, legal risk encompasses litigation risk, which is the risk of loss
resulting from being sued, including legal costs, settlement expenses, adverse judgments and
fines.
6. Reputation Risk –
Attention to reputation is a key aspect of the Company’s practices. The
Company’s ability to attract and retain customers and transact with its counterparties could be
adversely affected to the extent its reputation is damaged. The failure of the Company to deal, or to
appear to fail to deal, with various issues that could give rise to reputation risk could cause harm to
the Company and its business prospects. These issues include, but are not limited to, appropriately
dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money laundering,
privacy, record-keeping, sales and trading practices, and the proper identification of
legal, reputation, operational, credit, liquidity and market risks inherent in its products. The failure to
address appropriately these issues could make the Company’s clients unwilling to do business with
the Company, which could adversely affect the Company’s results.
George Gutowski writes from a caveat emptor perspective. Follow him on twitter @financialskepti and follow his evil twin brother who pens Wall Street Murder Thrillers @georgegutowski
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