JPMorgan Chase Analysis Project_WC

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>

JPMorgan Chase & Co. Analysis
Rita 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

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

JPMorgan Chase Analysis Project_WC

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