Risk at Chase Manhattan
Two main risks for Chase according to Marc Saprino (vice chairman) were credit and market risk.
Credit risk is the risk of loss due to borrower or counterparty default. Credit risk is managed at both the transaction and portfolio levels. Risk management processes are disciplined and designed both to preserve the independence and integrity of risk assessment and to integrate effectively with business management.
Market risk is the risk of losing money because the market price of an asset or a rate changes unfavorably.
Operating risk is the ‘risk of loss’ due to fraud by employees or outsiders unauthorized transactions by employees, and errors relating to computer and telecommunications system.
As Marc Shapiro says, Chase believes that the keys to managing its major risks are diversification and strong controls.
Methodologies to manage Market risk
1. Value at Risk
VAR can be defined differently for different applications, but here is how Chase defines it for the purpose of managing market risk: “VAR is a measure of the dollar amount of potential loss from adverse market moves in an everyday market environment. This approach is based on historical simulation and assumes that the most recent one-year historical changes in interest rates, foreign exchange rates, and equity and commodity prices are good indicators of future changes.
Operating risk relates to the strength of the control structure.
Many types of operating risk, including the risk of fraud by employees or outsiders, unauthorized transactions by employees, or operational errors, including clerical or record keeping errors or errors resulting from faulty computer or telecommunications systems.
VAR or stress test models is simply not feasible
With technological change and constant evolution in the financial services industry, it is sometimes difficult for back-office staff to keep up.
Our biggest risk every day on the operating risk side is people not doing the basics.
Methodologies to manage Operating risk
Systems of controls but still suffer losses.
Operating Risk Self-Assessment use of COSO [Committee of Sponsoring Organizations of the Treadway Commission].
One-third of the operating risk adjustment to capital under SVA is based on the business unit’s risk assessment done by senior management, and one-third is based on the internal audit grade. A risk self-assessment is an important part of both.
Chase’s management of market risk and credit risk is particularly strong and innovative and incorporates the latest technology in sophisticated VAR (for market risk) and stress test analyses.
From the other hand the management of operating risk is not so strong.