Risk Management

JPMorgan’s Balance Sheet Reflects Operating Risk Worries

After recent legal settlements and a cyber-attack, JPMorgan Chase is forced by regulators to hold more capital as a buffer against operational haza...
Iris DorbianSeptember 3, 2014
JPMorgan’s Balance Sheet Reflects Operating Risk Worries

JPMorgan Chase CEO Jamie Dimon says his firm is investing billions of dollars to streamline its compliance and IT security operations, but that doesn’t mean federal regulators believe those solutions will lessen the financial heavyweight’s risk profile.

JPMorgan Chase CEO Jamie Dimon

JPMorgan Chase CEO Jamie Dimon

In fact, based on the bank’s $23 billion of legal settlements made last year as well as its most recent cyber-attack, watchdogs could be said to be very apprehensive about pronouncing JPMorgan as well-protected against operational hazards.

Last month the bank revealed in a filing that its operational risk-weighted assets (RWAs), the benchmark that regulators use to gauge how much capital the bank will need to buffer itself against “potential losses from human error, external threats, fraud and litigation,” swelled to 6.7% in the second quarter of 2014, or $400 billion.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

JPMorgan Chase CFO Marianne Lake said earlier this year that the firm was not being treated fairly by regulators when it came to assessing its level of operational risk.

“It’s our belief that this firm is not exposed today or will not be exposed going forward to levels of risk at anywhere near [the] scale” that regulators’ models forecast, she said previously, insisting that JPMorgan is “working very hard with the industry to try and figure out how to better model changes in the business environment.”

In his annual shareholder letter Dimon last April, Dimon played down his firm’s operational risks. Bloomberg reported that Dimon reassured investors that “JPMorgan will spend an additional $2 billion from 2012 through the end of this year on improving controls, with an annual $250 million on cybersecurity.” To further placate worried investors, Dimon added that the bank has severed relationships with “potentially risky clients, including 500 foreign banks, and sold or shuttered businesses exposed to regulatory scrutiny such as physical commodities.”

In the August filing, Bloomberg notes, JPMorgan disclosed that its operational RWAs increased by $25 billion in the second quarter. “The $400 billion of such assets is 24% of the company’s total, up from 6% in 2010,” says the news outlet. The $400 billion “translates to about $38 billion of capital, more than twice what JPMorgan has to hold for market volatility.”

To be fair, Bank of America and Citigroup also had to increase their operational RWAs in the second quarter, BofA by $26 billion and Citi by $56 billion.

Operational risks are one of the three categories banks have to use to calculate capital needs, says Bloomberg, with credit and market risks being the other two.

As Bloomberg notes, “After a $6.2 billion loss in 2012 by a JPMorgan trader known as the London Whale, U.S. regulators became more aggressive in making sure banks’ internal models were appropriately measuring the operational hazards firms face.”

Source: Bloomberg JPMorgan Operating Risk Rises With Past Seen as Prologue

Photo: Flickr user Steve Jurvetson, CC BY 2.0

Case Study: How Edgewood Tahoe’s CFO Saved 500 Jobs From the Ashes