Question: 01:

Enterprise risk management is a management process where an arrangement is created

and with the assistance of technique, it expects to distinguish, evaluate and plan for any threats or
catastrophe that may meddle with an association activity and target. The chief has numerous
obligations while neglecting the venture hazard the executive’s cycle. They initially need to take
a gander at the system of the firm and adjust the dangers to the business capacities, they need to
build up an arrangement that distinguishes and assess any expected danger for the organization
and they figure an arrangement methodology or to limit any potential danger waiting about. The
chief ganders at outside dangers factors as well as inward dangers too and screens the work
environment exercises to ensure that all the danger the executives strategies are being followed..
Fiduciary duty is a legal term that describes the relationship between two people or
parties in which one party is obligated to act in the interest of the other. Being a director you play
the role of a fiduciary in which you are acting on the interest of the organization rather than your
interest. A fiduciary is basically responsible for the well being of the other party or person. A
fiduciary is legally bound to put the clients or organizations best interest in front of their own. As
the director is a fiduciary their responsibility is both ethical and legal. The director is put in a
prudent-person rule relationship with the organization in which the director is first and foremost
required to act according to the needs of the organization. There should be no conflict of interest
between the director and the organization and the director must always act according to the
organization needs. The Fiduciary (director) cannot profit from this relationship unless consent is
granted in the relationship.
Question: 02:
JP Morgan had always shown and practiced exceptional skills in handling risks. VaR
Model, also known as the Value Risk Model was one of the main strengths of JP Morgan. This
model was used by risk managers to asses and measure not only the level of risk but also
portfolio and position of a firm during a specified period of time frame. The Var Model helped in
detecting the extent of risk a firm is exposed to, calculating the loss that might occur amount of
the loss and the time frame of the loss as well. JP Morgan the pioneer in the field of risk
management first introduced the risk metrics in 1994. With the use of this, risk managers were
able to determine the VaR of investments. Due to this model’s success, the system was later
made public by JP Morgan. JP Morgan had another strength which was that within the risk
management sector, JP Morgan introduced a new software application. This software application
significantly in lowered the time and effort put in for detecting and calculating risk and was more
effective and efficient.
JP Morgan also had some apparent weaknesses in the risk management field which led
to some downfalls as well. First of all, JP Morgan’s good reputation and exceptional skills in risk
management, led them to being overconfident which resulted in them overlooking and ignoring
risks and warning signs before the loss. JP Morgan’s CIO unit had failed to understand the nature
of the risks taken. The senior management did not monitor anything closely either and were
unaware of the issues that were being overlooked or not pointed out. The act of reducing the risk-
weighted assets (RWA) also proved itself to be harmful later on. Dimon said that this strategy
was poorly communicated or properly tested or analyzed. With this, it was apparent that their
weaknesses regarding communication, control and bad judgments within JP Morgan.
Question: 03:
Basel III
In 2009 an international regulatory accord was introduced known as Basel III or
Third Basel Accord or Basel Standards. It was a set of reforms which was made to minimize the
risk that existed in the international banking market and for banks to be more transparent. It asks
banks to keep a limited reserve on their hands and to maintain proper leverage ratios. It contains
central banks of 28 countries. Under Basel III the banks are supposed to have at least 12.9% of
total capital ratio, with a minimum Tier 1 capital ratio is 10.5% of its total risk-weighted assets
(RWA), while the minimum Tier 2 capital ratio is 2% of the RWA.

JP Morgan’s Concerns:

In 2011 JP Morgan blamed the losses on Basel III. Due to the new regulations of
Basel III the CIO was told to reduce the size of the RWAs, as the CIO was trying to reduce the
model it kept increasing and it started to become more difficult to manage. The VaR model
further created problems for the RWAs done in 2012, as according to this model the RWAs had
to be reduced by 50% in comparison to the old model.

Dodd-Frank and JP Model:

Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010
under Obama’s administration. It was a financial reform legislation that was a response to the
2007-2008 crises. This act was to monitor the financial stability of the large firms and to provide
liquidations (Liquidation Fund) and more.

The Volcker Rule under the Dodd- Frank Act restricted banks investment. The CIO of JP
Morgan in London was trading in high risks and the traders did not understand the risk which
eventually ended up in a loss of $2 billion. After this loss JP Morgan was forced to strengthen
the Dodd- Frank Act.
Question: 04:
Risk weighted assets are basically used to determine the lowest sum of money any financial
institution should have to avoid bankruptcy.
In December 2011 CIO was requested to diminish to estimate of ROA because of
usage of Basel 3. The adjustments in Risk management under Basel 3 could expand JP Morgan's
RWAs multiple times which was a disturbing circumstance as increment in RWAs will leave less
cash for their business tasks and there will be a negative effect on the overall business.
Some key actions were taken by the CIO in order to manage the RWAs. Large and
complex positions were taken in order to decrease the size of RWAs which resulted in large
portfolios. This made it more difficult to manage the risk. Furthermore, changes in VaR model in
early 2012 were made which reduced the size of RWAS to 50 %. Although it was beneficial for
JP Morgan but still it didn’t prove to be satisfactory. Then there was a switch for VaR model to a
new method which had been tested and approved by independent model review group. This new
model proved to be more successful as it showed an average daily VaR within the CIO of $67
million compared to the $129 million when using the old model in April 2012.

Question: 05:
Failures in Risk Management:
The management at JP Morgan believed that the ever-changing regulations and
Basel III was the main reason of the losses that resulted. JP Morgan had reduced the size of
RAW in order to accommodate the rules of Basel III. As a result the portfolio increased and it
became difficult for the CIO to monitor, detect and characterize the risks associated. Then, the
size of positions became much larger which led to extreme difficulty in changing them in order
to manage them effectively
Failures in Risk Leadership:
The constant change in the CIO leadership was one of the main reasons of losses of
London Whale. Due to the changing leaders within the unit over the past 5 years, there were
problems that led inefficient outcomes. The issue with risk leadership can also be seen when the
senior management did not bother looking into or properly monitoring the strategies of managing
portfolios and furthermore, the management ignored and overlooked the risks that were taken
because they were overconfident of JP Morgan’s skills and practices.
Question: 06:
In this specific case, their approach, while highly subjective and unsystematic, did
not exceed those thresholds. Unfortunately for JPM as a whole, it should have been noticed that
the CIO VCG had obtained a “Needs improvement” rating from a JPM internal audit on March
30th for using untested risk models and weak justification when setting its allowable pricing
thresholds. Furthermore, as stated in the SCP’s own mandate, the CIO conceded that they were
not experts in derivatives valuation and were thus “price takers” when it came to portfolio
valuation. When the SCP was originally conceived, if there was a pricing discrepancy the CIO
was supposed to defer to the investment bank’s marks, as there was no fundamental reason for a
gross discrepancy to exist. As the CIO began exercising more pricing discretion, however, this
became a source of contention between them and the investment bank’s credit derivatives desk.
Not only was this a blatant internal inconsistency within JPM, but it created an awkward problem
as the CIO and the investment bank now found themselves on opposite side of the same trade.
Any hope of keeping this problem internal vanished on April 4th, when the Wall Street Journal
contacted JPM to inform them that it was writing an article on the CIO’s credit index portfolio.
They were able to name Bruno Iksil as the trader and even to estimate the size of their positions
in the market. A week or so before JPM’s CEO was to discuss preliminary Q1 2012 results, the
financial press was about to shine a very bright light into a dark corner of a bank which had
prided itself on its risk management ability.