Organization and Attributes
JP Morgan Chase & Co was incorporated in Delaware in 1968. It is a leading bank as well as the financial service provider in the U.S. Its operations span to other countries in the world reaching 100 new markets and employing 250,000 employees. The asset base for the company is $2.5 trillion and the stockholders are 254.2 billion. The bank is a leader in financial services, investment banking, commercial banking, asset management and financial transaction processing. Despite serving millions of U.S. citizens, the bank also deals with the prominent corporate, government as well as institutional clients. The business segments for the bank are organized in four segments for reporting purposes. They include consumer, wholesale, commercial and asset and wealth management. The bank operates in a competitive business environment with strong competition coming from other commercial banks, brokerage firms, merchant banks, investment banking companies as well as hedge funds. Other competitors include commodity trading companies, private equity firms, mutual funds and trust companies (Morgan $ Chase, 2018). The bank is under state and federal regulations and adheres to the applicable laws in different jurisdictions where the bank operates.
JP Morgan Chase & Co needs a solid risk management plan as a potential crisis with devastating effects will not only affect the clients of the bank but will also have a negative impact on the economy of the home country and other external markets. The bank can pose a serious financial threat to the economy of the U.S and other areas where it conducts its operations. The ability to protect the company from potential threats will therefore not only guarantee the clients access to banking services but will help to stabilize the economy. A serious crisis, for example, can force the clients to withdraw their funds and other financial institutions that have offered short-term loans to the bank using the overnight lending window will be highly affected and can face serious financial problems. The effect of a crisis can, therefore, lead to a ripple effect that will affect the entire banking industry not only in the U.S. but in countries around the world (Morgan $ Chase, 2018). Such a scenario can lead to economic problems as experienced in 2008 when the financial institutions were faced with liquidity problems. A financial crisis is not only bad for the banking industry but affect other sectors in the economy of different countries.
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Banking Crises
Crisis in the banking industry can be caused by bank runs, inadequate oversight by the government, positive feedback loops and contagion. Banks are sometimes unable to meet the increased demand by their customer leading to a crisis which can affect the entire industry due to the interdependence and has a potential to contribute to a global crisis. The stock market crash of 1929 known as the Black Tuesday, for example, was caused by complex inputs which led to a subsequent bank runs. Historical bank crisis was also caused by government failure to regulate or take appropriate action following a string of warnings from economists. Similarly, unethical and irresponsible leveraging of assets by banks caused a crisis in the banking industry. The banking crisis has been associated with widespread bank runs as customers lose confidence in the bank and try to withdraw their deposits as they do not trust that the bank will have money for future withdrawals.
Causes of Bank Crisis
A bank run is a major cause where depositors try to access their deposits at the same time. Despite the fact that the capital of a bank is tied up in investments, the liquidity of the bank in most cases will be unable to meet the sudden increase in demand. The public, in this case, will be in panic which in turn leads to an increase in withdrawals as the customers try to access their funds from the bank for lack of confidence. Such a scenario can lead to panic in the bank causing a systemic banking crisis as the free capital in the bank is withdrawn.
Stock market positive feedback loops is another cause of banking crisis. Investors are interested in investments that are liked by others. The situation creates an interdependent and self-fulfilling thought process. It can lead a rise and fall contributing to problems especially to banks with poorly designed leveraging. Another cause is the regulatory failure where governments fail to oversee the operations of the banks. Banks can leverage to gain from the market without considering the high risk associated with their actions (Pol, 2012). According to Fîrţescu (2012) contagion is another reason for banking industry crisis. It is a scenario where the failure of one economy can lead to a ripple effect on other economies that depend on it and occurs due to international interdependence and globalization.
The Consequence of Banking Crisis
Crisis in the banking sector has a significant effect both short term and long term on the economy of a country and also globally depending on the size of the bank and the countries in which it operates. The effect is a reduction in the output of an economy and a decline in economic growth. The crisis in a bank leads to an eventual economic and financial crisis in a country. Banks play a critical role in an economy and their failure can also have a significant effect on investment and leveraging. Domestically, banks coordinate the savings and investments in an economy by pooling money thus increasing the returns for all stakeholders and funding businesses. Bank crisis can, therefore, affect the entire system leading to other problems like business failures, unemployment, and economic slowdowns (Chakroun & Abid, 2015). The inability to access external debt makes it hard for businesses to finance their operations and investments. The inability by such businesses to operate optimally leads to a decline in sales and a sudden increase in the prices of commodities. The performance of any industry that depends on the debt will be affected negatively by consumer and investor confidence decline. Similarly, the overall economic output will also be affected. The rate of unemployment will increase and the government will be unlikely to meet its revenue targets as corporate tax will decline due to the slowdown in the economy (Kryukova & Asenova, 2015). Investor and consumer declining confidence will also affect the equity market, therefore, reducing business ability to access capital. The adverse effects lead to a cyclical effect where a domino effect is created across the domestic economic system.
The interconnectedness of the global economy and the global interdependency on trade has the potential to transfer a crisis from one country to another like what happened in 2008 when the crisis that emerged from the U.S. and some European countries affected the trading partners leading to a global crisis. The banking disaster led to a global financial meltdown and destroyed some economies around the world. Exports and imports play a crucial role in every nation and their balance of payment. It helps countries to access cheaper raw materials and external markets for their products. A decline in the global trade affects the volume of exports which leads to a decline in foreign exchange inflows and taxes (Schwartz, 2017). International trade has the ability to enhance the well being of the trading partners leading to the success of the domestic market.
Crisis Management in JP Morgan Chase & Co
The company has a solid risk management process but there are difficulties in predicting a crisis. According to the company, it is necessary to be prepared to deal with a crisis and to take appropriate actions as soon as possible (Morgan $ Chase, 2018). Similarly, it is advisable that the leadership identify and assess issues as well as options and seek expert advice if needed. Identifying all exposures and transactions is paramount including the industry, party or geography.
Program Management
The company has a preparedness policy that has been used to address the potential risks that are likely to affect the operations of the bank. Some of the identified risk factors include regulatory risks, market risks, credit risks, liquidity risks, legal risks and other business risks.
JPMorgan Chase & Co has a risk policy committee which assists the board to oversee the global risk management framework and also to approve as well as review the risk management policy. The committee is responsible for overseeing management responsibility in the exercise of its responsibilities to assess and manage the different types of risks, conduct capital planning, and analysis including the policies for risk identification. The committee meets when it is appropriate but not less than four times every year.
The administration of the program is done by the policy committee and the chief risk officer. The members of the committee are non-management directors and must be at least three at any time. The committee is chaired by an independent director who must meet the independence standards as required by the Stock Exchange corporate governance standards for listing (Morgan $ Chase, 2018). Membership to the committee is also reviewed each year.
Risk planning is an essential consideration for the company and is conducted periodically once a clear risks assessment has been conducted. The company has to be aware of the potential risks that are likely to affect its operations and the impact such risks will have on the company. Assessment, therefore, allows for advance planning including the allocation of required resources and the selection of the team to spearhead all efforts. Business impact analysis is conducted by the team to determine the effect that such an occurrence will have on the operations of the bank. The ability to determine the impact of the risk on the operations of the company helps to plan in advance and develop potential strategies that can be used to deal with such occurrences (Valsamakis, Vivian & Du Toit, 2010). It is then possi.ble to prevent the occurrence of hazard and deter any adverse effects from affecting the company's operation in the markets that it serves. The company will also be able to mitigate against any risks that occur in the course of its operations.
The implementation of risk management plans helps the company to put the plan into actions. It will ensure that the plans are tried in a real-world environment and its effectiveness determined. The implementation will require additional resources which will include trained staff, support from the management in the form of finances and involvement of the different stakeholders. Individual plans must be implemented accordingly and any deviations should be reported and corrective actions are taken to address the issue. It is necessary to consider the outcome of the plans and determine whether they are in line with the expectations or there are substantial deviations that need to be addressed. It is critical to ensure that all parties are aware of their responsibilities and what is expected of them.
Employees of the company need to be trained in crisis management and how they are supposed to handle any crisis in the event that it occurs. They should be aware of the different risks that the company is exposed to and the measures that have been put in place to address the issues. Incident management should be at the core of the company and its the responsibility of the management to ensure that the first responders are aware of what they are supposed to do.
Leadership Needed for Success
The ability of the company to deal with the threats identified depends on its leadership. The top management musts consider risk management as a top priority and dedicated adequate resources to address the issues identified in the business analysis. The leaders must spearhead a process of risk preparedness and develop appropriate strategies that will ensure that the company not only prepares for any potential threats but also survives any incident. The objective of the leadership is to ensure business continuity in the event that a crisis or risks strike (Deloitte, 2015). It should also ensure that the impact of such an incident is reduced to its minimum by preparing the entire organization to be ready for any eventualities.
The leadership must be open to external criticism and be ready to be corrected they must demonstrate the willingness to learn and explore new opportunities that will ensure that the company achieves its desired objective. Leaders must are connected to the entire organization and understand its strengths and weaknesses as far as risks management is concerned. They must develop appropriate strategies that address the identified issues and mitigate against any threats that can cause significant losses and public outcry. It is the responsibility of the leadership to develop appropriate communications strategies that can be used to communicate in the event of an incidence (Deloitte, 2015). The responsibility and how communication will be conducted will also determine whether the crisis will be addressed in time or it will escalate.
A successful team knows what is required of them in case an organization is facing a risk. They should demonstrate their leadership abilities and must steer the company out of the situation as fast as possible. They should demonstrate confidence and show little or no signs of confusion. During communication, they should give factual and verifiable information to avoid creating any gaps that might lead to a more serious issue. It is, therefore, the responsibility of the management to demonstrate strong risk management skills and be accessible to the concerned parties like reporters or media house. The leadership must have a single information source and therefore must ensure that no information is obtained from a different location (Deloitte, 2015). Information to be communicated to the public musts be agreed upon by all and should be factual. It is better to delay any such communication rather than giving false information which has not been agreed upon by the crisis team.
Models and Theories
The FEMA planning system that involves five stages will be used by the company for risk preparedness purposes. The five stages are program management, planning, implementation, testing and exercises and program improvement. The company has engaged in the different steps as a way of preparing for the potential risks that are likely to affect its activities. Diffusing a crisis in the company requires a clear understanding of crisis management before it can occur. Gonzalez –Herrero & Pratt (1995) developed a four-phase model for managing crisis which includes issue management, planning-prevention, the crisis, and post-crisis. The company has already defined what a crisis is and their causes. It has also identified the different risks that it is exposed to in addition to identifying the most critical business processes that must be protected from an incident in the event that there is such an occurrence. Crisis planning ensures that the company provides the best responses in the event of an occurrence. It prepares the entire organization to anticipate and be prepared against any eventualities that might disrupt its operations. The company is therefore well prepared and has developed a risk management plan that identifies the risks and the ways that can be used to deal with the incidences. Contingency plans are also useful in addressing the identified threats and helps the company to come up with the right strategies that will ensure the potential threat is dealt with and the company has recovered from the incident. Business continuity planning is all about overcoming the disruptions caused by the crisis and continuing with normal operations. A continuity plan helps to identify the critical process of the company and therefore try to minimize the disruptions (Valsamakis, Vivian & Du Toit, 2010). The critical actions are assigned contingency plans that must address the issue and come up with a solution as soon as possible. The plans are then tested to determine their ability to handle an incident equivalent to a potential threat thus identifying their resilience.
Structural-functional system theory was introduced by Infante et al (1997) and can be used to address the incidences by providing accurate information in the time when a crisis has occurred. This theory addresses the challenges of information networks and command within an organization and the communication process. It identifies the flow of information in an organization. Another theory is the diffusion of information theory by Rogers (3003) which describes the dissemination and communication in identified channels. Crisis arc model was introduced by Alan Hilburg and involves three phases of crisis avoidance, crisis mitigation and crisis recovery.
The different models and theories consider crisis as a critical situation that need immediate action in the form of ideas and communication. Organization should also adapt positive results. Crisis management will in this case require efficient and effective management activities based on good problem solving skills and knowledge.
Preparedness Planning and Development Phases
Successful management of a crisis requires adequate preparation. Organizations must understand what constitutes a crisis and the available policies, plans and processes need to function appropriately across all levels. It is possible to determine who is responsible for responding and the roles of different individuals. An organization needs appropriate tools and be ready to face any situation in the event of a crisis. Entities must therefore have relevant policies, processes and plans. They should be able to conduct preparedness audits and conduct appropriate training. They should also be a.ble to communicate effectively in case of a crisis.
According to the company, an appropriate way to reduce the losses from a situation is during the early stages or even before it happens. It is necessary to obtain a legal opinion on whether the appropriate documents are enforceable. Another important aspect is to know the priorities and limits of the company. A good structure and appropriate documentation including early identification maximize the ability to take appropriate action and to minimize financial loses. Appropriate risk management processes can help in managing a crisis.
References
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Schwartz, N. (2017). All-Clear for Big Banks Raises Fears of a Return to Risk. Retrieved from https://www.nytimes.com/2017/06/29/business/dealbook/banks-stress-test-dividends.html
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