JP Morgan Chase 2010 Annual Report Download - page 105

JPMorgan Chase & Co./2010 Annual Report 105
Credit risk capital for the consumer portfolio is based on product
and other relevant risk segmentation. Actual segment-level default
and severity experience are used to estimate unexpected losses for
a one-year horizon at a confidence level consistent with an “AA”
credit rating standard. See Credit Risk Management on pages 116–
118 of this Annual Report for more information about these credit
risk measures.
Market risk capital
The Firm calculates market risk capital guided by the principle that
capital should reflect the risk of loss in the value of portfolios and
financial instruments caused by adverse movements in market
variables, such as interest and foreign exchange rates, credit
spreads, and securities and commodities prices, taking into account
the liquidity of the financial instruments. Results from daily VaR,
biweekly stress-tests, issuer credit spreads and default risk calcula-
tions, as well as other factors, are used to determine appropriate
capital levels. Market risk capital is allocated to each business
segment based on its risk assessment. See Market Risk Manage-
ment on pages 142–146 of this Annual Report for more informa-
tion about these market risk measures.
Operational risk capital
Capital is allocated to the lines of business for operational risk
using a risk-based capital allocation methodology which estimates
operational risk on a bottom-up basis. The operational risk capital
model is based on actual losses and potential scenario-based stress
losses, with adjustments to the capital calculation to reflect
changes in the quality of the control environment or the use of risk-
transfer products. The Firm believes its model is consistent with the
Basel II Framework. See Operational Risk Management on pages
147–148 of this Annual Report for more information about opera-
tional risk.
Private equity risk capital
Capital is allocated to privately- and publicly-held securities,
third-party fund investments, and commitments in the private
equity portfolio to cover the potential loss associated with a
decline in equity markets and related asset devaluations. In
addition to negative market fluctuations, potential losses in
private equity investment portfolios can be magnified by liquidity
risk. Capital allocation for the private equity portfolio is based on
measurement of the loss experience suffered by the Firm and
other market participants over a prolonged period of adverse
equity market conditions.
Line of business equity
The Firm’s framework for allocating capital is based on 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;
and
• Provide comparability with peer firms for each of the lines of
business
Equity for a line of business represents the amount the Firm be-
lieves the business would require if it were operating independ-
ently, incorporating sufficient capital to address economic risk
measures, regulatory capital requirements and capital levels for
similarly rated peers. Capital is also allocated to each line of busi-
ness for, among other things, goodwill and other intangibles asso-
ciated with acquisitions effected by the line of business. Return on
common equity is measured and internal targets for expected
returns are established as key measures of a business segment’s
performance.
Line of business equity
December 31, (in billions)
20
10
2009
Investment Bank
$
40.0
$ 33.0
Retail Financial Services
28.0
25.0
Card Services
15.0
15.0
Commercial Banking
8.0
8.0
Treasury & Securities Services
6.5
5.0
Asset Management
6.5
7.0
Corporate/Private Equity
64.3
64.2
Total common stockhol
d
ers’ equity
$
168.3
$ 157.2
Line of business
equity
Yearly Average
(in billions)
2010
200
2008
Investment Bank
$ 40.0
$ 33.0 $ 26.1
Retail Financial Services
28.0
25.0 19.0
Card Services
15.0
15.0 14.3
Commercial Banking
8.0
8.0 7.3
Treasury & Securities Services
6.5
5.0 3.8
Asset Management
6.5
7.0 5.6
Corporate/Private Equity
57.5
52.9 53.0
Total common
stockholders’ equity $ 161.5 $ 145.9 $ 129.1
Effective January 1, 2010, the Firm enhanced its line of business
equity framework to better align equity assigned to the lines of
business with changes anticipated to occur in each line of busi-
ness, and to reflect the competitive and regulatory landscape. The
lines of business are now capitalized based on the Tier 1 common
standard, rather than the Tier 1 capital standard. In 2011, the
Firm will further evaluate its line-of-business equity framework as
appropriate to reflect future Basel III Tier 1 common capital
requirements.