JP Morgan Chase 2014 Annual Report Download - page 148

Management’s discussion and analysis
146 JPMorgan Chase & Co./2014 Annual Report
CAPITAL MANAGEMENT
A strong capital position is essential to the Firm’s business
strategy and competitive position. The Firm’s capital
strategy focuses on long-term stability, which enables the
Firm to build and invest in market-leading businesses, even
in a highly stressed environment. Prior to making any
decisions on future business activities, senior management
considers the implications on the Firm’s capital. In addition
to considering the Firm’s earnings outlook, senior
management evaluates all sources and uses of capital with
a view to preserving the Firm’s capital strength. Maintaining
a strong balance sheet to manage through economic
volatility is considered a strategic imperative by the Firm’s
Board of Directors, CEO and Operating Committee. The
Firm’s balance sheet philosophy focuses on risk-adjusted
returns, strong capital and reserves, and robust liquidity.
The Firm’s capital management objectives are to hold
capital sufficient to:
• Cover all material risks underlying the Firm’s business
activities;
• Maintain “well-capitalized” status under regulatory
requirements;
• Maintain debt ratings that enable the Firm to optimize its
funding mix and liquidity sources while minimizing costs;
• Retain flexibility to take advantage of future investment
opportunities;
• Maintain sufficient capital in order to continue to build
and invest in its businesses through the cycle and in
stressed environments; and
• Distribute excess capital to shareholders while balancing
other stated objectives.
These objectives are achieved through ongoing monitoring
of the Firm’s capital position, regular stress testing, and a
capital governance framework. Capital management is
intended to be flexible in order to react to a range of
potential events. JPMorgan Chase has firmwide and LOB
processes for ongoing monitoring and active management
of its capital position.
Capital strategy and governance
The Firm’s CEO, in conjunction with the Board and its
subcommittees, establish principles and guidelines for
capital planning, capital issuance, usage and distributions,
and establish capital targets for the level and composition
of capital in both business-as-usual and highly stressed
environments.
The Firm’s senior management recognizes the importance
of a capital management function that supports strategic
decision-making. The Firm has established the Capital
Governance Committee and the Regulatory Capital
Management Office (“RCMO”) as key components in support
of this objective. The Capital Governance Committee is
responsible for reviewing the Firm’s Capital Management
Policy and the principles underlying capital issuance and
distribution alternatives. The Committee is also responsible
for governing the capital adequacy assessment process,
including overall design, assumptions and risk streams, and
ensuring that capital stress test programs are designed to
adequately capture the idiosyncratic risks across the Firm’s
businesses. RCMO, which reports to the Firm’s CFO, is
responsible for reviewing, approving and monitoring the
implementation of the Firm’s capital policies and strategies,
as well as its capital adequacy assessment process. The
DRPC assesses the Firm’s capital adequacy process and its
components. This review determines the effectiveness of
the capital adequacy process, the appropriateness of the
risk tolerance levels, and the strength of the control
infrastructure. For additional discussion on the DRPC, see
Enterprise-wide Risk Management on pages 105–109.
Capital disciplines
In its capital management, the Firm uses three primary
disciplines, which are further described below:
• Regulatory capital
• Economic capital
• Line of business equity
Regulatory capital
The Federal Reserve establishes capital requirements,
including well-capitalized standards, for the consolidated
financial holding company. The Office of the Comptroller of
the Currency (“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.
The U.S. capital requirements follow the Capital Accord of
the Basel Committee, as amended from time to time. Prior
to January 1, 2014, the Firm and its banking subsidiaries
were subject to the capital requirements of Basel I and
Basel 2.5. Effective January 1, 2014, the Firm became
subject to Basel III (which incorporates Basel 2.5).
Basel III overview
Basel III, for U.S. bank holding companies and banks,
revises, among other things, the definition of capital and
introduces a new common equity Tier 1 capital (“CET1
capital”) requirement; presents two comprehensive
methodologies for calculating risk-weighted assets (“RWA”),
a general (Standardized) approach, which replaces Basel I
RWA (“Basel III Standardized”) and an advanced approach,
which replaces Basel II RWA (“Basel III Advanced”); and sets
out minimum capital ratios and overall capital adequacy
standards. Certain of the requirements of Basel III are
subject to phase-in periods that began January 1, 2014 and
continue through the end of 2018 (“Transitional period”)
as described below. Both Basel III Standardized and Basel III
Advanced became effective commencing January 1, 2014
for large and internationally active U.S. bank holding
companies and banks, including the Firm and its insured
depository institution (“IDI”) subsidiaries.