JP Morgan Chase 2014 Annual Report Download - page 26

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III. A NEW GLOBAL FINANCIAL ARCHITECTURE
detailed rules around it to which we need to
adapt. While it is a lot of work, we believe we
will be able to successfully accomplish all of
it. We have spoken about many of these rules
and requirements in the past so we won’t
go into greater detail here, other than on the
new G-SIB capital rules, which will have some
material eects on some of our businesses.
Intense eort is going into understanding
and adapting to the new G-SIB capital rules.
Last year, we described how we had to
manage the company to satisfy several new
constraints (all of the liquidity, leverage,
capital and CCAR requirements). To do
this, we were pushing these new rules
and requirements all the way down to the
product and client levels. The G-SIB capital
rules are a new constraint that we also need
to manage to, and for JPMorgan Chase, they
possibly are the most important constraint,
though this may change over time. There-
fore, we also need to push the new G-SIB
rules to the product and client levels.
Unlike RWA, which lets one measure the
risk embedded in each asset and, thus, the
capital needed to hold against it, G-SIB is
multivariate. G-SIB is not a simple calcula-
tion. It requires thousands of calculations,
and it does not look at just assets – it looks
at products, services, assets, type of client
(i.e., international and financial or corporate)
and collateral type, among others in order to
determine capital levels.
G-SIB will have its highest impact on non-
operating deposits, gross derivatives, the
clearing business in general and certain
clients, particularly financial institutions,
including central banks. At the end of the
day, we believe that we can manage through
this process and reduce our capital require-
ments while maintaining our core fran-
chises. To the extent that these changes
materially impact clients, we will do it
thoughtfully and carefully and help them
find appropriate alternatives.
G-SIB is not a direct measure of risk. The G-SIB
calculations show that JPMorgan Chase is the
most Global Systemically Important Bank,
and, therefore, we have to hold more capital
than any other bank in the world. Some of
our shareholders believe that this designa-
tion implies that before the additional capital
is held, we may be the riskiest institution,
too. But G-SIB is not a true measure of risk,
like RWA or CCAR. (And as shareholders
have mentioned to me, many of these
measures do not indicate how they would
look at risk; i.e., margins, earnings diversi-
fication and actual performance in tough
times, in addition to criteria such as capital
and liquidity.)
In fact, parts of G-SIB are very risk insensi-
tive – for example, it does not measure our
actual and largest risks in credit markets
(still our largest exposures) – and it adds a
lot of capital for some activities that have
absolutely no risk involved. One example
will suce: We take non-operating deposits
(deposits that are very short term in nature
from investors so they can manage their
short-term cash needs) from central banks
and large financial institutions. We have
approximately $350 billion of non-operating
deposits, a large portion from financial
institutions, which we immediately turn
around and deposit at the Federal Reserve,
and this is risk-free to us. We mostly do this
as an accommodation to large institutions
that need to move extensive sums of money
around and we generate minimal earnings
from this activity. We recently announced
that we are going to reduce these deposits
by $100 billion, which in the context of
the firm’s broader actions will reduce our
common equity requirements by approxi-
mately $3.5 billion. (Since these changes
involve some of the largest financial institu-
tions in the world, we are doing this very
carefully and are trying to make sure that
clients have access to alternatives such as
access to money market funds and direct
access to Federal Reserve facilities.)