JP Morgan Chase to spend over $100 million on new credit risk system

The executive committee of JP Morgan Chase has “essentially approved” a budget in excess of $100 million to be spent on creating a new integrated credit risk management system, according to Dennis Oakley, a managing director in the firm’s credit portfolio group.

The magnitude of the five-year budget is a reflection of the evolution of the credit risk market, and expected future changes in accounting practice, Oakley said, as he participated in a roundtable discussion at Risk’s Credit Risk Summit USA 2003 in New York.

He admitted that there are still remnants of credit risk systems developed at Manufacturers Hanover Corporation (which was subsumed into the Chemical Banking Corporation in 1991; the latter subsequently merged with Chase Manhattan in 1996, four years before the creation of JP Morgan Chase). “Back then, the only products were loans and deposits. Things have changed,” he added.

In the interim, loan syndications, and the secondary loans and credit derivatives markets, have flourished. Oakley said JP Morgan Chase’s recent filings elicit a “curious” fact: total derivatives receivables on balance sheet now exceed the $70 billion size of its commercial and industrial loan book, by more than $10 billion.

He pinpointed gaining an ability to quickly and accurately aggregate risk as of paramount importance. There’s also a need to generate a value-at-risk [figure] for the entire credit portfolio, and comprehensively stress test the credit risk book, as is currently done with the firm’s market [risk] book, according to Oakley. “Our view is that at some point in the not too distant future we will be marking-to-market the loan book,” he added.