April 2, 1997

J.P. Morgan creates a benchmark for credit risk measurement;
CreditMetrics™ evaluates credit risks across an entire organization

J.P. Morgan today introduced a sophisticated new tool for credit risk measurement -- CreditMetrics™ -- that provides transparent methodology, data, and software to evaluate credit risks individually or across an entire portfolio.

Carrying forward J.P. Morgan's leadership in risk management, and following in the tradition of RiskMetrics™, CreditMetrics™ creates an industry benchmark for quantifying risks in the world's largest market -- credit. CreditMetrics, the first readily available portfolio model for evaluating credit risk, enables a company to have an integrated view of credit risk across its entire organization and product spectrum. It also provides indicators of value-at-risk (VaR) due to changes in credit quality caused by upgrades, downgrades, and defaults, as well as portfolio concentration.

In the interest of establishing a benchmark in a field with as little transparency and precise data as credit risk management, J.P. Morgan invited five leading banking institutions -- Bank of America, BZW, Deutsche Morgan Grenfell, Swiss Bank Corporation, and UBS -- and a leading credit risk analytic firm, KMV Corporation, to be cosponsors of CreditMetrics™. With the support of these co-sponsors, Morgan hopes to accelerate market acceptance of the value of portfolio credit risk measurement tools.

CreditMetrics™ provides a useful methodology for managers concerned about risks in an environment where institutions globally are taking on more -- and more complex -- forms of credit risk. It measures credit risk across a broad range of instruments, including traditional loans, commitments, and letters of credit; fixed income instruments; commercial contracts (trade credits, receivables); and swaps, forwards, and other derivatives. In this regard, CreditMetrics™ will be useful to companies worldwide that assume credit risk in the course of their business. It is important to note that CreditMetrics™ does not calculate credit ratings or prices; it provides managers with a valuable tool to help improve their credit risk management decisions.

CreditMetrics™ consists of three main components:

• a methodology for assessing portfolio VaR caused by changes in obligor credit quality
  
  
• a historical dataset
  
  
• a software package (CreditManager™) implementing the methodology of CreditMetrics™ that can be purchased from J.P. Morgan or any of the product cosponsors

J.P. Morgan developed CreditMetrics™ to:

• create a benchmark for credit risk measurement. Without a common point of reference for credit risks, it is difficult to compare different sources and measures of risk. CreditMetrics™ provides the yardstick for measuring these risks, making them comparable.
  
  
• promote greater credit risk transparency and better market tools for managing credit risk. With a more precise understanding of risks comes the ability to manage risks more actively; transparent methodology as well as broad and deep markets are essential to effective risk management.
  
  
• encourage a regulatory capital framework that more closely reflects economic risk. Many regulated institutions today are subject to capital requirements that do not reflect economic risk. A portfolio VaR model for credit can be used as a risk-based capital allocation tool, equally appropriate for both internal and regulatory capital allocation.

"CreditMetrics™ is no substitute for sound judgment," said Stephen Thieke, head of J.P. Morgan's Corporate Risk Management group, adding, "Instead, it provides a useful tool that improves the analytical capabilities that a manager brings to bear in making a judgment."

Noting the competitive global marketplace and rapid growth in credit-sensitive capital markets, Thieke added, "As credit exposures have multiplied, the case for more sophisticated risk management techniques has become compelling. Common sense dictates that if businesses are demanding better performance in terms of return on economic capital, management must have a solid grasp of all forms of risk being taken to achieve returns."

Better risk measurement, better risk management
"CreditMetrics™ provides the necessary framework within which credit derivative and other credit transactions, whether for hedging or investment, can be evaluated," said Blythe Masters, head of J.P. Morgan's Global Credit Derivatives group. Noting that CreditMetrics is being released at a time in which innovative new credit risk transfer instruments are evolving rapidly, Masters added, "Credit derivatives have made possible more active trading of credit risks without interfering with other business objectives." She argues that the evolution of better models for credit risk measurement and better tools for credit risk management are mutually reinforcing: "Without the tools to transfer credit risk, we cannot properly respond to the recommendations of a portfolio model. Without a portfolio model, we cannot know which risks to trade."

In addition to providing a sound analytical tool for measuring risk, the CreditMetrics methodology encourages adoption of a regulatory capital framework that more closely reflects economic risk. The drawbacks of the Bank for International Settlements risk structure -- such as its one-size-fits-all risk weight for all corporate loans and lack of differentiation between diversified and undiversified portfolios -- are increasingly apparent to regulators and market participants.

How CreditMetrics™ works
The CreditMetrics™ methodology assesses individual and portfolio VaR due to credit exposure. It calculates this VaR by considering the exposure profile of each instrument in a portfolio; computing the volatility in value of each instrument caused by possible upgrades, downgrades, and defaults; and, taking into account correlations between each of these events, combining the volatility of the individual instruments to give an aggregate portfolio volatility. The result is a comprehensive measurement of portfolio VaR arising from credit exposure that is comparable to VaR measures commonly used to describe market risk.

The portfolio approach
A portfolio approach to credit risk gives managers the power to quantify the benefits of diversification and costs of concentration across a portfolio.

"It is only in a full portfolio context -- and with a model that addresses correlations -- that each institution's unique pockets of concentration can be properly identified," says Greg M. Gupton, CreditMetrics™ product manager. "Without this, investment decisions and risk-mitigating actions would be less informed than need be. It can make a real difference. Any given transaction can add a lot or a little risk depending on its effect on the overall portfolio."

There are a number of benefits that can be realized from the portfolio approach:

• It allows managers to control concentration risk (arising from increased exposure to one obligor or groups of correlated obligors), which can be mitigated through diversification.
  
  
• It allows managers to consider concentrations along a wide variety of dimensions such as industry sector, rating category, country, and instrument type.
  
  
• It enables managers to interpret portfolio credit risk in terms comparable to market VaR models such as RiskMetrics -- the benchmark for estimation of market risk developed by J.P. Morgan.
  
  
• It gives institutions greater flexibility in making investment decisions, extending credit, and taking risk-mitigating actions based on quantitative analysis.

Using CreditMetrics™
J.P. Morgan developed CreditMetrics to be the benchmark for credit risk measurement, so it's available industrywide. The Technical Document and data are accessible not only on the Internet but also from product sponsors worldwide.

Contacts for further information:

Americas:
(1-212) 648-3461
cmx_amer@jpmorgan.com

Europe:
(44-171) 325- 8007
cmx_euro@jpmorgan.com

Asia Pacific:
(852-2) 973-5646
cmx_asia@jpmorgan.com

Media Relations-New York (1-212) 648-9553