Capital Markets Case Final Report

Executive Summary

Recently, the Federal Reserve increased federal funds rare. The increase in the federal funds rate was informed by the emerging positive macroeconomic trends, which also involve the improvement of the labor conditions in the country. With signs indicating that the macroeconomic trends will get even better in the near future, the Federal Reserve is planning to further increase the federal funds rate. With a focus on JPMorgan Chase, this paper addresses the possible impacts of this policy on the capital market conditions, the impacts on the firm, inherent risks in the decision, and the measure of the risks. This paper proceeds to recommend the most appropriate risk management strategies, the investment strategies for the bank, funding strategies, as well as a consideration of ethical implications. The decision by the Federal Reserve System to increase the federal funds rate is normal when the economy is strong. At the level of the bank, one of the immediate impacts of this action is that it will make the bank to increase its costs of lending. As the bank increases its lending rates, many of its customers will find the cost too expensive to sustain, and they will be compelled to avid or scale down their borrowing. In the face of the challenges, JPMorgan Chase has an obligation to develop strategies that will allow it to achieve its objectives without necessarily being hindered by the changing policies. This paper has recommended a wide range of strategies that the company can deploy to remain competitive amidst the changing policies.

Organizational Profile

JPMorgan Chase is an American Multinational provider of banking and financial services. The company was founded in 1968 as J.P. Morgan & Co, but it acquired Chase Bank, and it was from there that it obtained its JPMorgan Chase. As a banking and financial services provider, the company provides both financial and investment services to its clients. The company provides a wide range of banking products across the world. Besides, the company provides financial services such as corporate strategy and structure, risk management, and capital raising in equity and debt markets. Brokerage and research are also functions that are performed by the company. In performing these roles, JPMorgan operates through certain segments.

Some of these segments include Consumer and Community Banking and Corporate and Investment Bank. The company also operates through Commercial Banking and Asset and Wealth Management. In the consumer and community banking segments, the bank provides personalized banking services to its clients through the various branches across the world, Automated teller machines, and online and mobile banking. The company uses modern technologies to make the performance of these functions realistic. Corporate and Investment banking, on the other side, targets a different set of customers with different products. The products and services offered by these units include market-making, prime brokerage, and treasury and securities products, among others. Over the years, the bank has been able to realize a significant level of development in these fields, and it ranks highly among consumers of banking and financial services.

S&P Global lists JPMorgan as the largest bank in the United States and the seventh-largest in the world. The bank was strengthened by its acquisition of Chase bank. The primary reason for its acquisition of Chases was to enable it to strengthen its investment portfolio. For a long time, JPMorgan Co. had viewed the investment sector as its forte, and it was interested in being the leader of the industry in this segment. Today, the company has an asset base of US$2.687 trillion. With this impressive asset base, the company has the capacity to stage a high level of competition in the market. By the end of the 4^th quarter of 2019, the company had 256,981 employees. In the same financial year, the company had a revenue of 115.6 billion USD. Looking at these figures, there is no way one can fail to take note of the fact that the company is very significant to the economy of the United States.

The image below shows the ownership of JPMorgan Chase;

Fig. 1 shareholders of JPMorgan Chase

From the figure above, mutual fund holders form the majority shareholders of the bank at 36.39%, followed by other institutional shareholders whose stake in the bank is 35.49%. Individual shareholders have a 1.36% stake in the company.

Major strategic objectives of JPMorgan Chase

It has taken JPMorgan Chase a solid strategy and effective leadership to achieve its current level of development. One of the factors that have enabled the bank to maintain a strong performance in the market even when the economic times seem prohibitive is strategic objectives that are future-oriented and, at the same time, serving the unique needs of its clients. The following are some of the strategic objectives that have played a critical role in the maintenance of the competitiveness of the company;

Focus on small businesses; JPMorgan Chase has come up with products and services that are tailored to address the unique needs of small business organizations (JPMorgan Chase & Co., 2014). The company realizes that while small businesses form a critical aspect of the company’s client base, most of them are too busy managing their businesses to visit the bank. Thus, the company has come up with strategies to enable the company to address the unique needs of the clients.
Focus on Corporate & Investment Bank; JPMorgan Chase has focused significantly on the corporate and investment bank, and as a result, it has come up with plans and policies that have made it possible for it to deliver top performance in the field and corporate and investment banking (JPMorgan Chase & Co., 2014).

Federal Reserve System

The term Federal Reserve System is used to refer to the Central Bank of the United States. The primary responsibility of the Federal Reserve System is to make sure the United States has a safe, transparent, and flexible monetary and financial system (Wells, 2017). To achieve these objectives, the Federal Reserve System makes and implements national monetary policies as well as making surer banks and other financial institutions operate within the rules. The Federal Reserve System also initiates disciplinary proceedings, and it takes measures against institutions that fail to operate within the rules.

Roles and Functions

The Federal Reserve System plays a wide range of roles that are critical in determining the direction and movement of the microeconomic events in the United States. There are three major functions that the Federal Reserve System performs. At the top of the functions of the organization is conducting the monetary policies for the country. The term monetary policy refers to the causes of action that are taken by a country’s central bank to regulate or control the flow of money in the economy and, as a result, enhance sustainable economic growth (Chappelow, 2020). When there is an excess flow of cash in the market, it is the responsibility of the Federal Reserve System to come up with appropriate policies that will create a balanced inflow of cash in the economy. Similarly, when there is limited money flowing in the economy, the Federal Reserve will generate policies to increase the flow of money in the market. The second function of the Federal Reserve System is to make sure there are effective payment systems in the economy. Finally, the Federal Reserve System carries out supervisory and regulatory functions over the banking operations. With this function, the institution protects the country’s financial systems from manipulation.

Operation Mechanics

The Federal Reserve System has 12 Districts, and each district has a chartered reserve bank that serves the particular jurisdiction. Within these 12 Districts, there are also 25 branches of the bank. The Federal Reserve is run by a seven-member board of governors (Wells, 2017). Each member of the board is appointed by the president and approved by the Senate to serve for a fourteen-year term. Every decision of the Federal Reserve System concerning monetary policies, bank regulations, and payment policies come from the board. This board carries out oversight responsibilities over the regional banks and the branches.

The Federal Open Market Committee (FOMC) is one of the most important organs of the Federal Reserve System. The primary responsibility of this committee is to determine the monetary policy direction that the county is to take. The Federal Open Market Committee (FOMC) is made up of the seven board members of the Federal Reserve and five presidents of the Federal Reserve Banks (Wells, 2017). While it is only the members of the Federal Open Market Committee (FOMC) who have voting rights, it is essential to note that all the presidents of the 12 Federal Reserve Banks have voting rights. The Federal Open Market Committee (FOMC) meets eight times each year to deliberate over and make suitable policies to address the prevailing economic conditions.

Capital Markets

The standards of living in society are determined largely by the levels of productivity in the economy. There are two major forces that influence the productivity of an economy. These are the increase in the accumulation of capital goods as well as the improvements in the quality of human capital. The capital market, on the other side, is defined as that aspect of a country’s financial system that deals with investment, raising capital, bonds, and shares trading, and other long-term investments. While there are many ways through which the Federal Reserve System may impact the economy, it is only through the capital market that the Federal Reserve System may have contact with the economy. One of the ways through which the Federal Reserve System impacts the capital markets is by developing monetary policies that go a long way in maintaining the stability of the supply of money and credit so as to make sure that growth is achieved by stable prices.

Scenario Analysis

Impacts on the capital markets

The decision by the Federal Reserve System to increase the federal funds rate is normal when the economy is strong. One of the most immediate impacts of this course of action is the increase in the cost of capital, thereby making borrowing expensive (Seabury, 2020). The intention is to make sure the costs are prohibitive so that there is a stable supply of money in the market. Another way in which this action will affect the capital markets is that it affects the psychology of consumers. When the rates increase, consumers get a signal that they need to change their consumption habits, and many people make decisions to reduce their expenditures. The net impact of this is that earnings will come down, and the stock prices will also decline (Seabury, 2020). From these explanations, it is notable that the increase in the federal rate is likely to have massive impacts on the market.

Impacts on the firm

The decision by the Federal Reserve System is likely to have significant impacts on the operations of JPMorgan Chase. One of the immediate impacts of this action is that it will make the bank to increase its costs of lending. As the bank increases its lending rates, many of its customers will find the cost too expensive to sustain, and they will be compelled to avid or scale down their borrowing. As stated in the strategic objectives section, JPMorgan Chase has small business organizations as its most significant clients. The increase in the cost of lending/borrowing is likely to hinder customers from gaining access to credit.

Risk Identification

Many risks accompany the decision by the Federal Reserve System to increase the federal fund rates. One of the most prominent risks is that it may discourage investment. In many instances, investments in a county rely prominently on borrowed funds. However, when the Federal Reserve System increases the federal fund rate, the costs of capital get so high that it may be very difficult for the customers to afford it. When the Federal Reserve System is making policies, it is necessary for the organization to create an environment that enhances investment. In this case, the decision of the Federal Reserve System does not create an environment that does not support investment. Another risk that this policy may have is that it may lead to the stagnation of economic development and, as a result, prevent the creation of employment opportunities. When the rates are increased, it becomes very difficult to expand businesses, and that means job creation will be compromised.

Risk measure

The term risk management refers to the practice of evaluating risks to determine their severity and deciding how to deal with them. As stated above, the initial risk is that the new policy may affect the investment activities in the country. The risk is significant because it is likely to affect the country in many ways. The United States requires a robust and active economy. When banks do not give credit facilities to consumers, it becomes difficult for business organizations to sustain their investment activities. The net impact of the decision is that it leaves business organizations with very little space to grow their businesses. The second risk is the inability of the economy to absorb the huge influx of job seekers into the market. The United States economy must be allowed to grow fast enough to absorb the number of students graduating from colleges and those emigrating from other countries. By coming up with this monetary policy, the Federal Reserve System will be making sure that the economic growth of the country is contained and prevented from achieving its maximum potential. The implications will be exceedingly far-reaching.

Recommendations

From the explanation of the risks above, it is evident that JPMorgan is going to have serious ramifications on its activities. Thus, it is necessary for the company to come up with strategies that are likely to mitigate the harsh effects of this

Risk management strategies

JPMorgan Chase has an obligation to develop strategies that will allow it to achieve its objectives without necessarily being hindered by the changing policies. From the beginning, the actions of the Federal Reserve did not come as a surprise. As long as the Federal Reserve System exists, there is no doubt that at one time, it will change the monetary policies. Thus, the first risk mitigation is for the bank to always carry its research and predict the direction which the monetary policies are going to take. From there, the bank will make sure that it develops appropriate interventions. The second mitigation measure that the organization needs to adopt is to slightly lower its internal lending rates so that even with the addition of the federal rates, the lending rates it offers to its clients will still be affordable to its clients.

Investment strategies

Many factors inform investment strategies that organizations adopt. One of the factors that inform the strategies taken by an organization is the need for risk aversion. In this instance, the decision that the company makes will be informed largely by the need to avoid being adversely affected by the new monetary policies. One of the strategies that the bank needs to use is to expand its investment portfolio (Shim, 2013). As the lending/borrowing activities go down, it becomes necessary for the bank to make sure that it has other avenues that can give it maximum returns. For example, the bank can invest in securities to increase its profitability. Investing in short term securities will give it an opportunity to retain only the amount of cash that it needs as well as generating revenues.

Funding Strategies

The most suitable funding strategy is to seek and attract bank deposits from its clients. The deposits will provide it with the cash reserves that it may need to take invest in other areas. The bank must come up with strategies and criteria that will make its banking systems attractive to clients. For example, the bank should offer lucrative interests in long-term deposits. The second option would be for the bank to seek loans from the Federal Reserve (Hanson et al., 2015). It needs to be known that, just like many other banks, JPMorgan Chase is free to seek loans from the federal bank to finance its investment activities.

Ethical Defense

There are set ethical standards with which all banks must comply. One of the ethical obligations of banks is to comply with all the rules and regulations as well as the laws that govern the sector. From the narration above, it is evident that there is no single law that the organization will be violating. Most importantly, the strategies and approaches that the bank is taking will be beneficial to its clients. JPMorgan realizes that it has an obligation to serve and address the interests of its clients, and the strategies above consider the interests of the clients.

References

Chappelow, J. (2020). Monetary Policy. Investopedia. Retrieved from https://www.investopedia.com/terms/m/monetarypolicy.asp

CNN Business. (, 2020). JPMorgan Chase & Co. Retrieved from https://money.cnn.com/quote/profile/profile.html?symb=JPM#:~:text=JPMorgan%20Chase%20%26%20Co.%20is%20a,financial%20and%20investment%20banking%20services.&text=It%20operates%20through%20the%20following,and%20Asset%20and%20Wealth%20Management.

Hanson, S. G., Shleifer, A., Stein, J. C., & Vishny, R. W. (2015). Banks as patient fixed-income investors. Journal of Financial Economics, 117(3), 449-469.

JPMorgan Chase & Co. (2014). Solid Strategy and Future Outlook. Retrieved from https://www.jpmorganchase.com/corporate/annual-report/2014/ar-solid-strategy.htm

Seabury, C. (2020). How Interest Rates Affect the U.S. Markets. Investopedia. Retrieved from https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp

Shim, J. (2013). Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification. Journal of Banking & Finance, 37(3), 761-772.

Wells, D. R. (2017). The Federal Reserve System: A History. McFarland.