Chase Manhattan Corporation

Kelompok 2:Ari Wardhana (0849013)Tria Mei Dian Sari (0849053)Yabes Patu Sibilang (0849055)Yosia Ongky (0849058)Ardhianto Prabowo (0850093)

Company Background•The third-largest bank in the United States,

behind Citigroup and Bank of America. In mid-2000, it had total asset of $400 billion and a market capitalization of $45 billion.

• The Chase Manhattan of 2000 is the result of two separate mergers in the 1990s involving three large banks: the merger of chemical Bank and Manufacturers Hanover Trust in 1991, and the merger of chemical and chase in 1996.

Company Background (cont’d)• The three major banking companies that merged in

the 1990s to form the present-day Chase Manhattan were themselves the products of scores of smaller mergers over almost 200 years.

• Over the years, the pioneered many of the innovations in financial services that are common today: ▫check endorsements▫bank credit departments▫check-clearing houses▫automated teller machine networks▫home electronic banking.

Chase Manhattan Today• Banking extends far beyond the historical function of

taking in customer deposit and lending the money to borrowers.

• Chase Manhattan is a prototype of the large, modern, global banking institution.

• The elements of the three major businesses that comprise Chase: Global Bank, National Consumer Services, and Global Services.• Global Bank provides an array of services that centers on

securities, investments, and syndications.• National Consumer Services provides credit cards and auto

and mortgage loan origination to individuals and small businesses in the Unites States.

• Global Services focuses on furnishing an array of investor, cash management, and processing services to investment companies and other businesses.

Chase Manhattan Today (cont’d)• Global Bank and National Consumer Services

generate almost the same amount of revenue, about 42 to 44 percent each, but Global Bank is immensely more profitable.

• In 1999, Global Bank earned about 62 percent of Chase cash profit, compare with National Consumer Services’ share of 29 percent.

• Loan receivable on Chase’s Balance sheet dated December 31, 1999, were $173 billion out of total assets of $406 billion, or 43 percent. Consumer loans comprise less than half of loans outstanding. Over 90 percent of the commercial loans initiated by Chase end up being placed with investor and other institutions. Chase earns money on these loans mainly through origination and servicing fees. This “laying off” of loan capital on others is a key component of Chase’s overall risk management strategy.

Risk at Chase Manhattan•Market Risk: The risk of losing money

because the market price of an asset or a rate changes unfavorably

•Credit Risk: The risk of loss because a counterparty to contract does not perform

•Operating Risk: The risk of loss due to fraud by employees or outsiders, unauthorized transactions by employees and operational errors.

Credit Risk•Credit Risk: risk of loss due to borrower

or counterpart default•Risk management processes: disciplined

and designed both to preserve the independence an integrity of risk assessment and to integrate effectively with business management

Credit Risk Management Process•Risk Measurement•The cost of credit risk loss provisions and

capital allocation•Credit risk management for consumer

assets•Credit risk management for commercial

assets

The Cost of Credit risk-Loss Provisions and Capital Allocation

•Use estimation of expected loss and loss volatility to set risk-adjusted loss provisions

•Allocate credit risk capital by portfolio management

•Allocation differentiated by product and product segment

Credit Risk Management for Consumer and Commercial AssetsConsumer Assets•Use portfolio modeling, credit scoring and

decision support tools•Project credit risk and establish

underwriting standardsCommercial Assets•Client selection process•Use global industry approach

Shareholder Value-Added

•Calculate a profit amount by subtracting a charge for invested capital from cash operating earning

•SVA lies in its automatic linkage of risks and rewards through the use of risk adjusted capital

What The Shareholders Wants?•Growth of free cash flow•Growth of revenue•Earning per share

Market Risk

•In Chase Manhattan market risk is calculated by two methods that are complementary but have different risk measurement.

•Market risk measurement:▫Value at Risk (VAR)▫Stress Testing

•SVA requires business units and decision makers to invest 13 percent capital higher than VAR or stress test result.

Value at Risk• VAR is a measure of dollar amount of potential loss

from adverse market moves in an everyday market environment.

• VAR in Chase Manhattan mostly uses historical approach.

• The historical volatility of every given assets are calculated one year backward.

• The simulation is run in every day at closing trading day.

• The results are reported by individual positionand also aggregated across business, geographies, currencies, and type of risk.

Stress Testing•Stress testing is a simulation process that

uses several scenarios of worst event in every single day.

•Basically, stress testing is using same techniques, systems, and assumptions of calculation. The difference is stress testing does not refer to the past event instead it uses several scenarios

Stress Testing (cont’d)

•The scenario:▫The most important thing in stress test▫Is derived from past crises or hypothetical

event▫Must be carefully choosen,because poorly

selected scenario could be mislead the decision making process

▫Is approved by Market Risk Committee based on several aspects, First, should be pertinent to the risk Unlikely but plausible

The Benefit•These techniques (SVA, VAR, and stress

test) could reduce risk profile of Chase Manhattan by 50 percents.

•They are simple and easy to use model.•Could be used by every trader in Chase

Manhattan group across the globe.

Credit Risk•Measurement:

▫Assessment of the risk of loss resulting from default by an obligor or counterparty

▫Make estimation using statistical techniques for each segment of the portfolio, of expected and unexpected losses

▫The expected and un expected losses could be factored into product prices

Credit Risk Management Processes•Guided by policies and procedures

established by the Chief Credit Officer•Intended to ensure that risks are

accurately assessed and properly approved and monitored

Mechanism1. Transferring much of the risk to other institutions via

syndication.▫ Syndication process is the tactic by which we’ve

achieved the strategic objective of significantly bringing down the wholesale risk portfolio while growing wholesale revenues

2. Applying the SVA methodology to performance evaluation within the credit extension units.

▫ Two behaviors are reinforced:a. Retain less of the outstanding loan because it reduces the

capital chargeb. Ensure that loan pricing includes a sufficient premium for

risk because riskier loans will be charged higher risk-adjusted capital

Example•Chase use stress tested

while bad economic conditions will no doubt have a negative effect on earnings, the bank’s capital base will still be secure

Mark-to-Market

Approach to the loan portfolio makes sense for two reasons:a. As a public companyb. Relies heavily on selling off large pieces

of its loan portfolio as a basic risk management tool

Operating Risk•Types of operating risk:

▫Fraud by employees or outsiders▫Unauthorized transactions by employees▫Operational errors

Clerical or record keeping errors Errors resulting from faulty computer or

telecommunications systems•Lossess in operating risk tend to be

unpredictable and not subject to quantitative modelling.

Operating Risk (cont’d)•Operating risk affects a manager’s SVA

calculation just as market and credit risks do, but the methodology is not nearly as advanced.

•Capital is adjusted for operating risk only at the business unit level, based on three factors: expense dollars, audit scores, and risk evaluation rankings.▫Example: A manager who receives as audit score

of A would be assigned less capital than one who receives a C, thereby increasing the first manager’s SVA and incentive compensation

Operating Risk (cont’d)• Corporate controller (Joseph Sclafani): a business unit could

make significant improvements to its SVA through the management of operating risk by automating formerly manual process.

• Problem: The existence of legacy systems that originated in the three predecessor banks▫ The technology does not automatic matching further increase

the risk▫ Difficulty for staff to keep up the technological change they are

not doing the basics further increase the severity of unexpected losses

• Solution: ▫ Continually update the technology that does automatic matching▫ Change the staff behavior ▫ Maintain a system of control and provide direct incentives

Operating Risk Self-Assesment•Chase Manhattan use COSO document

(Commitee of Sponsoring Organizations of the Treadway Commission) with modifications appropriate for Chase’s needs▫On annual basis▫Completed by all the business units and if

there are weaknesses identified, the units also have to submit both plans and time frames for improving those weaknesses (not only check off boxes, but also give responses)

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