Download Kelompok 2

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 mid2000, 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:
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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 Assets
Consumer Assets
• Use portfolio modeling, credit scoring and
decision support tools
• Project credit risk and establish underwriting
standards
Commercial 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
Mechanism
1. Transferring much of the risk to other institutions
via syndication.
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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.
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a.
b.
Two behaviors are reinforced:
Retain less of the outstanding loan because it reduces
the capital charge
Ensure that loan pricing includes a sufficient premium
for risk because riskier loans will be charged higher riskadjusted 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 company
b. 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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