JP Morgan Chase 2014 Annual Report Download - page 155

JPMorgan Chase & Co./2014 Annual Report 153
Basel III Advanced Fully Phased-in RWA, excluding capital
buffers currently in effect, at year end 2014 based on its
understanding of how the FSB proposal may be
implemented in the United States. The FSB is expected to
revise its proposal following a period of public consultation
and findings from a quantitative impact study and market
survey to be conducted in the first quarter of 2015. The
final proposal is expected to be submitted to the G-20 in
advance of the G-20 Summit scheduled for fourth quarter
of 2015. U.S. banking regulators are expected to issue an
NPR that would outline TLAC requirements specific to U.S.
banks.
Regulatory capital outlook
The Firm expects to continue to accrete capital in the near
term and believes its current capital levels enable it to
retain market access, continue its strategy to invest in and
grow its businesses and maintain flexibility to distribute
excess capital. The Firm intends to balance return of capital
to shareholders with achieving higher capital ratios over
time. Additionally, the Firm expects the capital ratio
calculated under the Basel III Standardized Fully Phased-In
Approach to become its binding constraint by the end of
2015, or slightly thereafter. As a result, the Firm expects to
reach Basel III Advanced and Standardized Fully Phased-In
CET1 ratios of approximately 11% by the end of 2015 and
is targeting reaching a Basel III CET1 ratio of approximately
12% by the end of 2018.
The Firm’s capital targets take into consideration the
current U.S. Basel III requirements and contemplate the
requirements under the U.S. G-SIB proposal issued on
December 9, 2014 and therefore, assume a 4.5% G-SIB
capital surcharge. These targets are subject to revision in
the future as a result of changes that may be introduced by
banking regulators to the required minimum ratios to which
the Firm is subject. In particular, if the Firm’s G-SIB capital
surcharge is determined to be lower than 4.5%, the capital
targets would be adjusted accordingly. The Firm intends to
manage its capital so that it achieves the required capital
levels and composition in line with or in advance of the
required timetables of current and proposed rules.
Economic risk capital
Economic risk capital is another of the disciplines the Firm
uses to assess the capital required to support its
businesses. Economic risk capital is a measure of the capital
needed to cover JPMorgan Chase’s business activities in the
event of unexpected losses. The Firm measures economic
risk capital using internal risk-assessment methodologies
and models based primarily on four risk factors: credit,
market, operational and private equity risk and considers
factors, assumptions and inputs that differ from those
required to be used for regulatory capital requirements.
Accordingly, economic risk capital provides a
complementary measure to regulatory capital. As economic
risk capital is a separate component of the capital
framework for Advanced Approach banking organizations
under Basel III, the Firm continues to enhance its economic
risk capital framework.
Line of business equity
The Firm’s framework for allocating capital to its business
segments is based on the following objectives:
• Integrate firmwide and line of business capital
management activities;
• 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
believes the business would require if it were operating
independently, considering capital levels for similarly rated
peers, regulatory capital requirements (as estimated under
Basel III Advanced Fully Phased-In) and economic risk
measures. 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.
ROE is measured and internal targets for expected returns
are established as key measures of a business segment’s
performance.
Line of business equity Yearly average
Year ended December 31,
(in billions) 2014 2013 2012
Consumer & Community Banking $ 51.0 $ 46.0 $ 43.0
Corporate & Investment Bank 61.0 56.5 47.5
Commercial Banking 14.0 13.5 9.5
Asset Management 9.0 9.0 7.0
Corporate 72.4 71.4 77.4
Total common stockholders’ equity $ 207.4 $ 196.4 $ 184.4
Effective January 1, 2013, the Firm refined the capital
allocation framework to align it with the revised line of
business structure that became effective in the fourth
quarter of 2012. The change in equity levels for the lines of
businesses was largely driven by the evolving regulatory
requirements and higher capital targets the Firm had
established under the Basel III Advanced Approach.
On at least an annual basis, the Firm assesses the level of
capital required for each line of business as well as the
assumptions and methodologies used to allocate capital to
its lines of business and updates the equity allocations to its
lines of business as refinements are implemented.
Line of business equity January 1, December 31,
(in billions) 2015(a) 2014 2013
Consumer & Community Banking $ 51.0 $ 51.0 $ 46.0
Corporate & Investment Bank 62.0 61.0 56.5
Commercial Banking 14.0 14.0 13.5
Asset Management 9.0 9.0 9.0
Corporate 76.0 77.0 75.0
Total common stockholders’
equity $ 212.0 $ 212.0 $ 200.0
(a) Reflects refined capital allocations effective January 1, 2015.