JP Morgan Chase 2014 Annual Report Download - page 165

JPMorgan Chase & Co./2014 Annual Report 163
imply an increase to modeled annual loss estimates of
approximately $100 million.
• A 50 basis point deterioration in forecasted credit card
loss rates could imply an increase to modeled
annualized credit card loan loss estimates of
approximately $600 million.
• A one-notch downgrade in the Firm’s internal risk
ratings for its entire wholesale loan portfolio could imply
an increase in the Firm’s modeled loss estimates of
approximately $1.8 billion.
• A 100 basis point increase in estimated loss given
default for the Firm’s entire wholesale loan portfolio
could imply an increase in the Firm’s modeled loss
estimates of approximately $140 million.
The purpose of these sensitivity analyses is to provide an
indication of the isolated impacts of hypothetical
alternative assumptions on modeled loss estimates. The
changes in the inputs presented above are not intended to
imply management’s expectation of future deterioration of
those risk factors. In addition, these analyses are not
intended to estimate changes in the overall allowance for
loan losses, which would also be influenced by the judgment
management applies to the modeled loss estimates to
reflect the uncertainty and imprecision of these modeled
loss estimates based on then current circumstances and
conditions.
It is difficult to estimate how potential changes in specific
factors might affect the overall allowance for credit losses
because management considers a variety of factors and
inputs in estimating the allowance for credit losses.
Changes in these factors and inputs may not occur at the
same rate and may not be consistent across all geographies
or product types, and changes in factors may be
directionally inconsistent, such that improvement in one
factor may offset deterioration in other factors. In addition,
it is difficult to predict how changes in specific economic
conditions or assumptions could affect borrower behavior
or other factors considered by management in estimating
the allowance for credit losses. Given the process the Firm
follows and the judgments made in evaluating the risk
factors related to its loans and credit card loss estimates,
management believes that its current estimate of the
allowance for credit loss is appropriate.
Fair value of financial instruments, MSRs and commodities
inventory
JPMorgan Chase carries a portion of its assets and liabilities
at fair value. The majority of such assets and liabilities are
measured at fair value on a recurring basis. Certain assets
and liabilities are measured at fair value on a nonrecurring
basis, including certain mortgage, home equity and other
loans, where the carrying value is based on the fair value of
the underlying collateral.
Assets measured at fair value
The following table includes the Firm’s assets measured at
fair value and the portion of such assets that are classified
within level 3 of the valuation hierarchy. For further
information, see Note 3.
December 31, 2014
(in billions, except ratio data) Total assets at fair value Total level 3 assets
Trading debt and equity instruments $ 320.0 $ 22.5
Derivative receivables 79.0 12.6
Trading assets 399.0 35.1
AFS securities 298.8 1.0
Loans 2.6 2.5
MSRs 7.4 7.4
Private equity investments(a) 5.7 2.5
Other 36.2 2.4
Total assets measured at fair value on
a recurring basis 749.7 50.9
Total assets measured at fair value on a
nonrecurring basis 4.5 3.2
Total assets measured at fair value $ 754.2 $ 54.1
Total Firm assets $ 2,573.1
Level 3 assets as a percentage of total
Firm assets 2.1%
Level 3 assets as a percentage of total
Firm assets at fair value 7.2%
(a) Private equity instruments represent investments within the Corporate
line of business.
Valuation
Details of the Firm’s processes for determining fair value
are set out in Note 3. Estimating fair value requires the
application of judgment. The type and level of judgment
required is largely dependent on the amount of observable
market information available to the Firm. For instruments
valued using internally developed models that use
significant unobservable inputs and are therefore classified
within level 3 of the valuation hierarchy, judgments used to
estimate fair value are more significant than those required
when estimating the fair value of instruments classified
within levels 1 and 2.
In arriving at an estimate of fair value for an instrument
within level 3, management must first determine the
appropriate model to use. Second, the lack of observability
of certain significant inputs requires management to assess
all relevant empirical data in deriving valuation inputs —
including, for example, transaction details, yield curves,
interest rates, prepayment rates, default rates, volatilities,
correlations, equity or debt prices, valuations of
comparable instruments, foreign exchange rates and credit
curves. For further discussion of the valuation of level 3
instruments, including unobservable inputs used, see
Note 3.
For instruments classified in levels 2 and 3, management
judgment must be applied to assess the appropriate level of
valuation adjustments to reflect counterparty credit quality,
the Firm’s credit-worthiness, market funding rates, liquidity
considerations, unobservable parameters, and for portfolios
that meet specified criteria, the size of the net open risk