JP Morgan Chase 2008 Annual Report Download - page 84

Management’s discussion and analysis
82 JPMorgan Chase & Co./ 2008 Annual Report
Line of business equity
December 31, (in billions) 2008 2007
Investment Bank $ 33.0 $ 21.0
Retail Financial Services 25.0 16.0
Card Services 15.0 14.1
Commercial Banking 8.0 6.7
Treasury & Securities Services 4.5 3.0
Asset Management 7.0 4.0
Corporate/Private Equity 42.4 58.4
Total common stockholders’ equity $134.9 $ 123.2
Line of business equity Yearly Average
(in billions) 2008 2007
Investment Bank $ 26.1 $ 21.0
Retail Financial Services 19.0 16.0
Card Services 14.3 14.1
Commercial Banking 7.3 6.5
Treasury & Securities Services 3.8 3.0
Asset Management 5.6 3.9
Corporate/Private Equity(a) 53.0 54.2
Total common stockholders’ equity $129.1 $ 118.7
(a) 2008 and 2007 include $41.9 billion and $41.7 billion, respectively, of equity to
offset goodwill, and $11.1 billion and $12.5 billion, respectively, of equity, primarily
related to Treasury, Private Equity and the Corporate pension plan.
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks
underlying the Firm’s business activities, utilizing internal risk-assess-
ment methodologies. The Firm assigns economic capital primarily
based upon four risk factors: credit risk, market risk, operational risk
and private equity risk. In 2008, the growth in economic risk capital
was driven by higher credit risk capital, which was increased primarily
due to a combination of higher derivative exposure, a weakening
credit environment, and asset growth related to the Bear Stearns and
Washington Mutual transactions.
Economic risk capital Yearly Average
(in billions) 2008 2007
Credit risk $ 37.8 $ 30.0
Market risk 10.5 9.5
Operational risk 6.3 5.6
Private equity risk 5.3 3.7
Economic risk capital 59.9 48.8
Goodwill 46.1 45.2
Other(a) 23.1 24.7
Total common stockholders’ equity $129.1 $118.7
(a) Reflects additional capital required, in the Firm’s view, to meet its regulatory and
debt rating objectives.
CAPITAL MANAGEMENT
The Firm’s capital management framework is intended to ensure that
there is capital sufficient to support the underlying risks of the Firm’s
business activities and to maintain “well-capitalized” status under
regulatory requirements. In addition, the Firm holds capital above
these requirements in amounts deemed appropriate to achieve the
Firm’s regulatory and debt rating objectives. The process of assigning
equity to the lines of business is integrated into the Firm’s capital
framework and is overseen by the ALCO.
Line of business equity
The Firm’s framework for allocating capital is based upon the follow-
ing objectives:
• integrate firmwide capital management activities with capital
management activities within each of the lines of business
• measure performance consistently across all lines of business
• provide comparability with peer firms for each of the lines of
business
Equity for a line of business represents the amount the Firm believes
the business would require if it were operating independently, incor-
porating sufficient capital to address economic risk measures, regula-
tory capital requirements and capital levels for similarly rated peers.
Capital is also allocated to each line of business for, among other
things, goodwill and other intangibles associated with acquisitions
effected by the line of business. Return on common equity is meas-
ured and internal targets for expected returns are established as a
key measure of a business segment’s performance.
Relative to 2007, line of business equity increased during 2008,
reflecting growth across the businesses. In addition, at the end of the
third quarter of 2008, equity was increased for each line of business
in anticipation of the future implementation of the new Basel II capi-
tal rules. For further details on these rules, see Basel II on page 84 of
this Annual Report. Finally, during 2008, capital allocated to RFS, CS,
and CB was increased as a result of the Washington Mutual transac-
tion; capital allocated to AM was increased due to the Bear Stearns
merger and the purchase of the additional equity interest in
Highbridge; and capital allocated to IB was increased due to the
Bear Stearns merger.
In accordance with SFAS 142, the lines of business perform the
required goodwill impairment testing. For a further discussion of
goodwill and impairment testing, see Critical Accounting Estimates
Used by the Firm and Note 18 on pages 119–123 and 198–201,
respectively, of this Annual Report.