JP Morgan Chase 2008 Annual Report Download - page 214

Notes to consolidated financial statements
212 JPMorgan Chase & Co./ 2008 Annual Report
Note 30 – Capital
The Federal Reserve establishes capital requirements, including well-
capitalized standards for the consolidated financial holding company.
The OCC establishes similar capital requirements and standards for
the Firm’s national banks, including JPMorgan Chase Bank, N.A., and
Chase Bank USA, N.A.
There are two categories of risk-based capital: Tier 1 capital and Tier
2 capital. Tier 1 capital includes common stockholders’ equity, quali-
fying preferred stock and minority interest less goodwill and other
adjustments. Tier 2 capital consists of preferred stock not qualifying
as Tier 1, subordinated long-term debt and other instruments quali-
fying as Tier 2, and the aggregate allowance for credit losses up to
a certain percentage of risk-weighted assets. Total regulatory capital
is subject to deductions for investments in certain subsidiaries.
Under the risk-based capital guidelines of the Federal Reserve,
JPMorgan Chase is required to maintain minimum ratios of Tier 1
and Total (Tier 1 plus Tier 2) capital to risk-weighted assets, as well
as minimum leverage ratios (which are defined as Tier 1 capital to
average adjusted on-balance sheet assets). Failure to meet these
minimum requirements could cause the Federal Reserve to take
action. Banking subsidiaries also are subject to these capital
requirements by their respective primary regulators. As of December
31, 2008 and 2007, JPMorgan Chase and all of its banking sub-
sidiaries were well-capitalized and met all capital requirements to
which each was subject.
The Federal Reserve granted the Firm, for a period of 18 months fol-
lowing the Bear Stearns merger, relief up to a certain specified
amount and subject to certain conditions from the Federal Reserve’s
risk-based capital and leverage requirements with respect to Bear
Stearns’ risk-weighted assets and other exposures acquired. The
amount of such relief is subject to reduction by one-sixth each quar-
ter subsequent to the merger and expires on October 1, 2009. The
OCC granted JPMorgan Chase Bank, N.A. similar relief from its risk-
based capital and leverage requirements.
The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at December 31, 2008 and 2007.
Tier 1 Total Risk-weighted Adjusted Tier 1 Total Tier 1
(in millions, except ratios) capital capital assets(c) average assets(d) capital ratio capital ratio leverage ratio
December 31, 2008(a)
JPMorgan Chase & Co. $136,104 $ 184,720 $ 1,244,659 $ 1,966,895 10.9% 14.8% 6.9%
JPMorgan Chase Bank, N.A. 100,594 143,854 1,153,039 1,705,750 8.7 12.5 5.9
Chase Bank USA, N.A. 11,190 12,901 101,472 87,286 11.0 12.7 12.8
December 31, 2007(a)
JPMorgan Chase & Co. $ 88,746 $ 132,242 $ 1,051,879 $ 1,473,541 8.4% 12.6% 6.0%
JPMorgan Chase Bank, N.A. 78,453 112,253 950,001 1,268,304 8.3 11.8 6.2
Chase Bank USA, N.A. 9,407 10,720 73,169 60,905 12.9 14.7 15.5
Well-capitalized ratios(b) 6.0% 10.0% 5.0%(e)
Minimum capital ratios(b) 4.0 8.0 3.0(f)
(a) Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination
of intercompany transactions.
(b) As defined by the regulations issued by the Federal Reserve, OCC and FDIC.
(c) Includes off-balance sheet risk-weighted assets in the amounts of $357.5 billion, $332.2 billion and $18.6 billion, respectively, at December 31, 2008, and $352.7 billion, $336.8
billion and $13.4 billion, respectively, at December 31, 2007, for JPMorgan Chase, JPMorgan Bank, N.A. and Chase Bank USA, N.A.
(d) Adjusted average assets, for purposes of calculating the leverage ratio, include total average assets adjusted for unrealized gains/losses on securities, less deductions for disallowed
goodwill and other intangible assets, investments in certain subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from
Tier 1 capital.
(e) Represents requirements for banking subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage com-
ponent in the definition of a well-capitalized bank holding company.
(f) The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4% depending on factors specified in regulations issued by the Federal Reserve and OCC.
Note: Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities which have resulted from both nontaxable business combinations and from tax-
deductible goodwill. The Firm had deferred tax liabilities resulting from nontaxable business combinations totaling $1.1 billion at December 31, 2008, and $2.0 billion at December
31, 2007. Additionally, the Firm had deferred tax liabilities resulting from tax-deductible goodwill of $1.6 billion at December 31, 2008, and $939 million at December 31, 2007.