Analysis and Evaluation of J.P Morgan Chase & Co’s Risk Management Policies and Procedures’s Effectiveness

1. Introduction

J.P. Morgan & Co is a commercial and investment banking institution founded in 1871. In 2019 J.P. Morgan & Co served around 63 million households and 4 million small businesses within the US (J.P. Morgan | Official Website, 2021). J.P. Morgan & Co mainly deals with the management of capital and investment, as a result, the firm must practice diligent firmwide, strategic, capital, and liquidity risk management. J.P. Morgan & Co have been critiqued on their risk management style due to its limitations. In many ways, these limitations are more a debate about risk to reward ratio, and the firm’s ability to adjust to a rapidly changing global environment. The report will touch on the strengths of the firm’s current risk management strategy and the real consequences of not taking enough risk, in other words, their weaknesses. Due to the large size of the firm, there are a lot of risk management protocols in place. The report only evaluates a small portion of the vast policies the firm put in place, in reality, deeper research should be conducted on the effectiveness of the firm’s policies. However, for the purpose of the report, it will evaluate some very important critique made against fixed risk management methods, perhaps exposing some limitations.

2. Brief Summary of Firm Risk Management Structure

J.P Morgan Chase & Co are a firm with a market capitalization of just over $470 billion (JPMorgan Chase Market Cap | JPM, 2021). The organization deals with large investments and capital. As a result,essential risk management such as credit, liquidity, capital, operational, etc are critical to the smooth functioning of the firm (M. Crouhy et al, 2006). J.P Morgan Chase & Co have different departments responsible for different aspects of risk management. The main strategy J.P Morgan manages firmwide and strategic risk is by assigning departments to a key risk and management related function of the firm (JP Morgan Chase & Co 2019 Annual Report, 2020). The firm is made of the firm’s operating committee, board of directors, audit committee, risk committee and compensation & management development committee. The firm’s operating committee is made up of their chief executive officer (Jamie Dimon), chief risk officer (Ashley Bacon), chief financial officer (Jennifer Piepszak) and other senior executive members. The operating committee is responsible for referring issues to the board of directors. The firm’s board of directors is responsible for providing oversight of risk and is the main committee to oversee risk. The board of directors are responsible for the oversight of management for the J.P Morgan Chase Bank. The risk and audit committee are responsible for the risk and control oversight on behalf of the J.P Morgan Chase Bank. The compensation & management development committee are responsible for compensation and “other management related matters”. As mentioned above, the firm is relatively large and requires adequate capital to support its “business activities and associated risks during normal economic environments and under stressed conditions” (JP Morgan Chase & Co 2019 Annual Report, 2020). “A strong capital position is essential to the Firm’s business strategy and competitive position” (JP Morgan Chase & Co 2019 Annual Report, 2020). The firm’s board of directors and operating committee believe that “Maintaining a strong balance sheet to manage through economic volatility is considered a strategic imperative”. The firm’s capital risk management philosophy is to ensure long term stability, and investing in industry-leading businesses even under stressed situations. The philosophy is reflected within their liquidity and capital management protocol. 

3. Brief Analysis

Some have critiqued the heavy reliance on policies and rules, stating that the firm’s reliance on rules may offset some uncertainty, but does not offset the individual biases within the organisation limiting the discussion of critical issues (Kaplan and Mikes, 2012). While these comments are quite old, recent activity in the crypto space exposed a bias within the organisation. In 2017, chief executive of the firm bashed crypto in particular Bitcoin, as a fraud. He was cited saying “If you're stupid enough to buy it, you'll pay the price for it one day” and “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.”. In many ways, the report is not discussing the validity of crypto currency, but rather the innate hypocrisy when in 2019 they started investing in blockchain facilities and doubled down on their decision in 2021 (J.P. Morgan Creates Digital Coin for Payments, 2021). Validly so, the firm has received backlash for their rigid mindset on a new innovation such as blockchain, some customers, even refusing to use their blockchain service. It is critical not to hold the firm down for changing its mind, however, this instance is a scenario that repeated itself throughout history. In many ways, this may be a potential argument against rigid risk management and even more so, traditional and rigid policies against a new volatile market and socio economic environment.

4. Conclusion

J.P Morgan & Co are a large firm and managing institutional capital is a difficult process. The firm set up a number of plans, committees, and procedures to manage firmwide, strategic, capital, and liquidity risk. The firm is a long lived entity with a long term risk management philosophy. To a large extent, these risk management procedures offer a competitive advantage against many other banking and investment competitors, as evidenced by the firm’s long life span and experience. However, as mentioned above, the focus on risk adverse management and long term survival can be detrimental in a fast changing environment. Where, during its golden days the firm’s risk management was critical to its survival, today, some argue that it is missing disruptive technologies due to their risk adverse nature. Notably their chief executive officer denouncing cryptocurrencies, just a few years later, offered crypto services to its users. Thus, these kinds of traditional beliefs and mindsets may render it difficult for the firm to adapt to a new risky environment, where the traditional risk averse assets and industries may be cannibalized by the large amount of technological advancement and socio economic change occurring globally. 

5. Key Findings

The firm’s risk management is a strong competitive advantage and strength, however, it may also be its weakness if it fails to adapt to new technologies quickly enough. Hence, it might not matter how many risk management policies the firm puts in place, if the management is not flexible enough to react to uncertainty and new ideas, they might risk even greater losses in the long term.

6. Reference List

Jpmorgan.com. 2021. J.P. Morgan Creates Digital Coin for Payments. [online] Available at: <https://www.jpmorgan.com/solutions/cib/news/digital-coin-payments> [Accessed 2021].

Jpmorgan.com. 2021. J.P. Morgan | Official Website. [online] Available at: <https://www.jpmorgan.com/global> [Accessed 2021].

Jpmorganchase.com. 2020. JP Morgan Chase & Co 2019 Annual Report. [online] Available at: <https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/investor-relations/documents/annualreport-2019.pdf> [Accessed 2021].

M. Crouhy et al, The Essentials of Risk Management (2006).

Ycharts.com. 2021. JPMorgan Chase Market Cap | JPM. [online] Available at: <https://ycharts.com/companies/JPM/market_cap> [Accessed 2021].

Kaplan, R. and Mikes, A., 2012. JP Morgan’s Loss: Bigger than “Risk Management”. [online] Harvard Business Review. Available at: <https://hbr.org/2012/05/jp-morgans-loss-bigger-than-ri> [Accessed 2021].