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Running head: Evaluate a Firms Financial Best Practices

Evaluate a Firms Financial Best Practices JPMorgan Chase & Co Introduction JPMorgan Chase is one of Americas leading financial institutions that provide a wide range of financial services globally. The deregulation of the financial industry as enacted in the Modernization Act of 1999, display significant opportunities for financial institution to engage in almost of the financial services globally. This indicates the scope of JPMorgan Chase seize the advantage of the deregulation and engage in the following financial services. The financial services include asset management, commercial banking, investment bank, private banking, securities services and treasury services (JPMorgan.com). Evaluating a firm financial best practice is a complex, especially financial institution that engaged in a wide range of products and services in the global market environment. An organization best practice is determine by its customer satisfaction, compliance with applicable laws, corporate governance, corporate social responsibility, economic growth and shareholders equity (Pride & Ferrell, 2003). Corporate governance and social responsibility has become the norm for firm to report to the public of their management structure and economic development in the economy and society. Customer satisfaction is largely influenced by the quality of the firms products and services. The application of macroeconomics represents the check and balance of the firm financial practice in an economy. The regulatory bodies prescribe policies to control the firm behavior in an economy. If unregulated the financial infrastructure may be jeopardizing to an extent that the market will disorientate. For example, Enron and WolrdCom where engage in financial fraud that disorientates the financial market. In addition, the abuse and manipulation of the subprime loan and inefficiency of financial institutions justify the inability of meeting the regulatory

standard of the best practice. This paper will investigate a firms financial best practices in the financial industry and describe the concept of corporate governance and social responsibility. Furthermore, the paper will discuss the operation of financial services together with the associated financial risk. The findings and recommendation are not conclusive and it is only useful for this paper. Background JPMorgan Chase & Company was established in 1799 and is considered as one of the oldest financial institutions in the world. The company has a long history of heritage banks including JPMorgan & Co, The Chase Manhattan Bank, Bank One, Chemical Bank, The First National Bank of Chicago and National Bank of Detroit (JPMorgan.com). Currently the firm operates in more than 50 countries and provides financial products and services, including commercial bank, investment bank, financial transaction processing, asset management, and private equity. According to the firm 2012 annual report, the reported total assets amounted to $2.4 trillion and stockholders equity of $204.1 billion. JPMorgan Chase & Co as a leading supplier of financial products, the firm major customers include household, corporate, institutions and government. Historically, the firm has proven its capability to meet the challenges facing the financial industry. However, the global financial crisis affects the performance and liquidity of JPMorgan Chase & Co prompting management to seek the federal government for assistance. This brought a controversy of public perception of financial institution risk management and the regulatory and supervision of the Federal Reserve. Stakeholders, including taxpayers, customers and the government think fit that it is appropriate to rescue the bank from failure and provide $25 billion

to bail out the firm (CNNMoney). This action is questionable evaluating the firm management structure towards the exposure of risk of the products and services. Managing Products and Services From its traditional commercial banking operations, the management of JPMorgan Chase & Co has to diversify the firm financial services to a more complex assets management, securities services, investment banking and treasury services. Managing a wide array of financial products in the global market requires skills and knowledgeable personnel to provide quality services to the firm respective customers. The board of directors and senior executives should play active role ensuring the legal and ethical environments are compactable with the core vision of the firm (Jianhua, Peng, & Baozhi, (n.d). Customer satisfaction is a paramount of any firm strategy plan to delivery their products and services. To sustain future growth the firm should identify a target market, evaluating every customer to ensure that credits are allocated equally with caution that funds do not land to defaulting segment. The US Department of treasury establishes a financial crime enforcement network that regulates customer identification procedure. A financial firm should follow this procedure to ensure that they adhere to the banking best practice guidelines. The policy is important to identify customers and institutions that might be involved in a money laundry for several reasons. Financial institutions are shifting credit risk product to non-credit risk product such as treasury services. JPMorgan Chase & Co provide treasury services as a form of cash management, trade, liquidity, commercial card and escrow services to support business enterprise working capital (JPMorgan.com). Treasury services provide financial institutions with added revenue and steam of cash flow. The implication of treasury service is the costing and

pricing for each client account is a major concern. Best Practices - Treasury Services, (2007), state that the delivery of treasury services mechanisms are constantly evolving, which requires revolving capital investments, the cost associated with such systems is highly competitive, and it will continue to rise. To achieve result of treasury service the firm should understand the pricing, costing and profitability elements their platform. Managing Risk Financial institutions are risk bearer, meaning that every product and service they offered carry a substantial risk regardless of the nature and amount. As compare to another business enterprise, the risk can be limited to operational activity. Evaluating the best practice of trading risk management of financial institutions is dependent upon the effectiveness of the policies, infrastructure and methodological approach prescribe and implemented by the financial institutions (Standard & Poor, 2005). Developing a strategy plan without implementation and monitory is meaningless. To minimize trading risk, including market risk, credit risk, operational and reputation risk, the financial institutions should maintain an ongoing assessment of its practice and take immediate action (Standard & Poor, 2005). Many studies conclude that financial institutions trading losses are associated with the weakness within the framework of its policies, infrastructure and methodologies. The most important risks of intermediaries are interest-rate risk, credit risk and liquidity risk. Credit risk is associated with the borrowing to householder, commercial and counterparties. Following the slow recovery of the economy, the Federal Reserve imposes on financial institutions, particularly commercial banks to increase credit to household and commercial as a method of stimulating the economy. Banks are cautioned about the credit allocation system and the lesson learned from the subprime loan arena resulting high credit default rate.

To evaluate credit risk bank should deploy credit rating criteria of assessing the repayment capacity, the character, capital, collateral, condition and compliance of the borrower or counterparty (Machiraju, 2008). Moreover, the bank could apply the repayment capacity model to evaluate the integrity, moral character, management capability and loan agreement (Wenner, Navajas, Trivelli & Tarazona, 2007). The best practice to manage credit risk is to develop a strategy plan with the participation of all senior management, including the board of directors. The strategy plan should include the bank policies and procedures of evaluating credit risk and segregate the task of evaluating and monitoring credit allocation (Basel, 2000). Basel (2000), further prescribe that a sound credit granting process is needed to enable the bank to clearly define, identifying the target market, and understand the borrowers and counterparties financial needs. Changes in an interest rate affect the underlying assets performance due to mismatch of the asset and liability. The re-pricing model and duration models are the most used method by financial institution to evaluate the changes of interest rates and the economic value of the assets. Both models provide useful information on the changes in income and the balance sheet position of the underlying assets. The re-pricing model enables the bank to forecast the profitability of changes in interest rate and allow managers to restructure the assets and liabilities that is sensitive to re-pricing (Saunders & Cornett, 2007). Duration, on the other hand, determines the economic value to the institution by measuring the weighted average of steam of cash flow of the underlying asset during the period of its maturity (Mahshid & Raiszadeh, 2004). The advantage of this model is that it measures the long-term cash flow of sensitive assets and liability. Following the complexity of credit risk and interest rate risk, the management of JPMorgan

Chase & Co needs to establish an oversight board and comprehensive risk management system (Board of Governors of the Federal Reserve System). Corporate Governance and Social Responsibility Taxpayers support the Federal government to rescue troubling banks and other financial institutions, including JPMorgan Chase & Co due to the global financial meltdown. After rescuing the financial institutions, some firms utilize the funds to compensate chief executives, make bad deals that raise several questions, whether it was necessary to the government to intervene. Identifying corporate governance in financial institutions is very important as compare to another entity. Financial institutions are the back office of the economy of every nation, and it is highly regulated to ensure the financial systems are sound and stable (Zeidan, 2013). Following the accounting scandal and corporate fraud, stakeholders are becoming aware of the relevance of corporate governance rather than an increase in performance and stock price. Corporate governance is referred to the internal and external behavior of corporate officers responsibility in adhering to the ethical and legal perspective, (Zeidan, 2013). The soundness of corporate culture has an effects on the firm reputation both internal and external environment. This is important for financial institutions, especially acting as an intermediary between depositors and borrowers. An ethical value is not limited to the organization work place but also influences customers, competitors and the financial market. A firm financial performance as reported on the financial statements does not have immediate effects upon the stock price, based on the efficient market hypotheses (Bodie, Kane, & Marcus, 2010). The financial market reacts immediately to shock such as corporate fraud or scandals. Most chief executives officers are aware of the consequence of violating the legal aspect and still pursue their agenda. Directors, chief executives officers and other officers have fiduciary responsibility

for the economic growth of the firm. However, the social factors influence their behavior for violating regulatory and policies. The corporate social responsibility of financial institution is similar to other entities in terms of their obligation to stakeholders. Stakeholders refer to customers, employees, suppliers, the community and government. The distinction between financial institution and other business entitys social responsibility is that financial institutions have an obligation for the economic growth of stakeholders (Prior, & Argandoa, 2009). Because of their role as the intermediary, the firm social responsibility goes beyond the normal investment for the economy and community. Household and business enterprise requires funds for real estates, business expansion, new auto and other financial needs. Government and other institutions provide welfare and community development but lack the capability to provide the social obligations to meet the financial requirements of household and business entities. Credit spread is the most important social responsibility of financial institutions and making it accessible within the community or the public is a critical decision that needs further consideration (Prior, & Argandoa, 2009). JPMorgan Chase & Co as a global leader in the financial industry would face challenges in developing economy and communities with low income in terms of allocation of credit. Failing to meet the consumers need would affect the firm reputation if not properly manage. However, the firm has to balance its responsibility by satisfying both the stockholders and the society. Commercial banks and insurance companies are more suitable for microfinance.

Findings JPMorgan Chase & Co has violated many regulatory enforcement standards in the global financial market in terms of risk management. This is due to its weakness in internal control and organization structure. Most of the products and services expose the firm to credit risk, liquidity and interest rate, especially treasury services, asset management, investment bank and commercial banking (JPMorgan.com). Operating in developing economy may limit the firm for future expansion, due to low-income earners and the economic infrastructure. Considering corporate social responsibility, it is unethical to forego economic growth of household and small business of the economic structure of the emerging market. Financial institutions regulators and supervisors in most economies are outdated and policymakers react to shock, which affect the financial market. Globalization generates addition revenue to the firm, but it may expose the firm to substantial lose if there is lacked of organization structure. JPMorgan Chase & Co has been in spot light recently due to lack of oversight of its derivatives that render the firm to serious trading loses. Evaluating the financial institutions best practice is different from other business enterprises because of its social obligation. Recommendation and Conclusion The major factor that influences financial institutions is the risk associated with its products and services. The initial stage is to develop a strategic plan with the aid of the board and senior officers setting the policies and procedures paying extra attention to risk, corporate governance and social responsibility. Management must consider the economic infrastructure of emerging economic evaluation the income, business growth and monetary policies. Train staff on a periodical basis to improve the credit application process. Invest on technology and increase

data security. To increase competitiveness the firm must invest on community development, focus on schools and universities, as this will increase customer data. Develop new regulations to improve the credit allocation and tightening loopholes to control credit risk due to default. Regulators should investigate foreign banks and its economy financial system before allowing the firm to establish a subsidiary in the host country. This will eliminate risk of money laundry through the foreign bank. Many financial institutions violate trading practice especially derivatives and currency.

References Basel (2000), Principles for the Management of Credit Risk, Basel Committee on Banking Supervision, Retrieved from http://www.bis.org/publ/bcbs75.htm Best Practices - Treasury Services. (2007). Journal of Performance Management, 20(2), 9-31. Bodie, Z., Kane, A., & Marcus, A. J. (2010), Investments Vol. 1 (8th Edition), The McGrawHill-create New York, USA CNNMoney.Com, Financial Institutions bail out, 2009 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: new perspectives for the finance curriculum. Financial Services Review, 10(1-4), 197. Jianhua, Z., Peng, W., & Baozhi, Q. (n.d). Bank risk taking, efficiency, and law enforcement: Evidence from Chinese city commercial banks. China Economic Review, 23284-295. doi:10.1016/j.chieco.2011.12.001 JPMorgan Chase & Co, Annual Account 2012, retrieved from http://www.jpmorgan.com/tss/WssHome/Securities_Services/1114735358205 Machiraju, R. H (2008), Modern Commercial Banking (2nd Edition), New Age International (P) Ltd, Publishers New Deli 110002 Mahshid, D., & Raiszadeh Naji, M. (2004). Managing Interest rate risk-A case study of four Swedish savings banks. Retrieved from https://gupea.ub.gu.se/handle/2077/1867 Pride, M.W & Ferrell, C.O (2003), Marketing Concepts and Strategies (12th Edition), Houghton Mifflin Company, NY, USA Prior, F., & Argandoa, A. (2009). Best Practices in Credit Accessibility and Corporate Social Responsibility in Financial Institutions. Journal Of Business Ethics, 87251-265. doi:10.1007/s10551-008-9799-8 Saunders, A., & Cornett, M. M (2007), Financial Mrkets and Institutions, an introduction to risk management approach, The McGraw-Hill-create New York, USA Standard & Poors (2005), Enterprise Risk Management for Financial Institutions, The McGrawHill Companies, NY USA Wenner, M., Navajas, S., Trivelli, C., & Tarazona, A. (2007). Managing credit risk in rural financial institutions in Latin America (No. 34819). Inter-American Development Bank. Yeager, T. J., Yeager, F. C., & Harshman, E. (2007). The Financial Services Modernization Act:

Evolution or Revolution?. Journal Of Economics & Business, 59(4), 313-339. doi:10.1016/j.jeconbus.2006.08.002 Zeidan, M. (2013). Effects of Illegal Behavior on the Financial Performance of US Banking Institutions. Journal Of Business Ethics, 112(2), 313-324. doi:10.1007/s10551-012-12532

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