By Tom Groenfeldt
Risk management is driven by tools and processes, says David Weisbrod, JP Morgan Chase & Co.'s global head of risk for treasury and securities services. In the case of JP Morgan, those technologies and procedures have helped the bank maintain a position of strength throughout the financial crisis.
Effective risk management starts with the tone set at the top of an organization, according to Weisbrod, who has held risk positions at the firm for 30 years. Because CEO and chairman Jamie Dimon and the rest of JP Morgan senior management have made risk a focus, he says, "the role of a risk management executive [is] that much easier."
Having leaders who understand risk reporting and the business may be even more important than the systems in place, says Cubillas Ding, senior analyst at Celent. Dimon was aware of what was happening in the market, how other firms were faring and understood JP Morgan's risk profile, says Ding.
Rather than acting as cops, the bank's risk team works closely with the money making side. Though they are "certainly independent," says Weisbrod, "risk managers are embedded in--and an active partner with--the business colleagues in everything that goes on at the management table."
But in securities servicing, which includes custody and stock lending, the risk team is responsible not just to the bank but also its customers. Those clients, says Weisbrod, are increasingly sophisticated and want to know what JP Morgan is doing to protect their business. During requests for proposals and annual customer meetings, risk managers are finding themselves questioned closely about their operations, technology and credit and payment controls.
Both Weisbrod and Ed Neeck, global head of risk in the worldwide securities services unit, point to JP Morgan's constant updating of its front-end presentation tools to make the information easier to understand and work with. The changes, they stress, are tweaks to existing systems rather than major overhauls.
"These may be tough times," adds Neeck, "but we are still investing in our technology." The firm, he says, is improving its systems for client reporting and client position reporting.
One of the more important procedural components for JP Morgan is a monthly committee meeting that lasts at least three hours. The sessions are led by Heidi Miller, head of treasury and securities services, and Conrad Kozak, CEO of worldwide securities services. "It's not the risk people only talking to each other, but a committee that is designed to engage the business leaders," explains Weisbrod, adding that the risk staffers create the agenda and ensure that the right issues are discussed. Problems raised at the meetings are assigned for follow-up.
The credit crunch has led the firm to expand the range of events it prepares for, says Weisbrod. "What has changed is the definition of unthinkable risk," he notes. "The collapse of Bear, Lehman, Fannie Mae and Freddie Mac, or the government intervention in AIG-all of those things were formerly unthinkable, yet we had effective risk protocols in place. Now the questions we ask are much more probing in counterparty risk, credit risk and, in worldwide securities services, in areas such as securities lending, collateral management and tri-party repo. All of those areas have been featured in the news over the last 12 months."
JP Morgan effectively managed its exposures during the Lehman Brothers meltdown in September, according to Neeck. "There was no glitch from our perspective," he says. "The operational challenges were met with flying colors."
"It was an enormously challenging event for us and the entire market, but in the end the firm was prepared and performed well," says Neeck. "From the experience, we are using the lessons learned to further improve our operational and risk management readiness."
In monitoring subcustodian and political risk, JP Morgan has the advantage of a local presence in multiple regions. "We work with many banks around the world, not only for custody but also for cash correspondent clearing, and we make sure that we are on top of who we are using," says Neeck. "Their credit worthiness and problems that may be in that country are very important to us. Fortunately, we are around the world and we have experts where we are doing business, and we are dealing with these banks both as clients and as a service provider."
During what Weisbrod calls an "extraordinary period" in the financial services industry, JP Morgan has acquired Bear Stearns and expanded its retail banking operations with the Washington Mutual deal. "Our ability to weather this storm has not surprised me at all," contends Weisbrod. "It comes down to our people working long hours and many weekends and the processes and tools we have in place. So far we are passing the test. The only way you can deal with that kind of uncertainty is through the right principles."
"It's really crucial to combine a top-down approach, where senior management is fully engaged with managing risk, and good risk systems pushing information about the firm's exposures from the bottom up," notes Celent's Ding.
JP Morgan has more space to breathe now and may be profiting from its successful risk management. "Earlier in the crisis we were seeing a flight from fear," says Neeck. "However, in the last few months that has shifted to a flight to quality." Neither Weisbrod nor Neeck would say whether the firm has been picking up custody business from less stable competitors.
This article can also be found at SecuritiesIndustry.com.
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