JP Morgan Chase 2010 Annual Report Download - page 103

JPMorgan Chase & Co./2010 Annual Report 103
Risk-based capital ratios
December 31,
2010
2009
Tier 1 capital
(a)
12.1 % 11.1%
Total capital
15.5
14.8
Tier 1 leverage
7.0
6.9
Tier 1 common
9.8
8.8
(a) On January 1, 2010, the Firm adopted accounting standards which required the
consolidation of the Firm’s credit card securitization trusts, Firm-administered multi-
seller conduits, and certain mortgage and other consumer securitization entities. Re-
fer to Note 16 on pages 244–259 of this Annual Report for additional information
about the impact to the Firm of the new guidance.
A reconciliation of Total stockholders’ equity to Tier 1 common
capital, Tier 1 capital and Total qualifying capital is presented in the
table below.
Risk-based capital components and assets
December 31, (in millions)
2010
2009
Tier 1 capital
Tier 1 common:
Total stockholders’ equity
$
176,106
$ 165,365
Less: Preferred stock
7,800
8,152
Common stockholders’ e
quity
168,306
157,213
Effect of certain items in accumulated
other comprehensive income/(loss)
excluded from Tier 1 common equity (748) 75
Less: Goodwill
(a)
46,915 46,630
Fair value DVA on derivative and
structured note liabilities related
to the Firm’s credit quality 1,261 912
Investments in certain subsidiaries
and other 1,032 802
Other intangible assets
(a)
3,587 3,660
Tier 1 common
114,763
105,284
Preferred stock
7,800
8,152
Qualifying hybrid securities and nonco
n-
trolling interests(b) 19,887 19,535
Total Tier 1 capital
142,
450
132,971
Ti
er 2 capital
Long
-
term debt and other instruments
qualifying as Tier 2 25,018 28,977
Qualifying allowance for credit losses
14,
959
15,296
Adjustment for investments in certain
subsidiaries and other (211) (171)
Total Tier 2 capital
39,7
66
44,102
Total qualifying capital
$
182,
216
$ 177,073
Risk-weighted assets
(c)(d)
$ 1,174,978 $1,198,006
Total adjusted average assets
(e)
$ 2,024,515 $1,933,767
(a) Goodwill and other intangible assets are net of any associated deferred tax
liabilities.
(b) Primarily includes trust preferred capital debt securities of certain business
trusts.
(c) Risk-weighted assets consist of on– and off–balance sheet assets that are
assigned to one of several broad risk categories and weighted by factors rep-
resenting their risk and potential for default. On–balance sheet assets are
risk-weighted based on the perceived credit risk associated with the obligor or
counterparty, the nature of any collateral, and the guarantor, if any. Off–
balance sheet assets – such as lending-related commitments, guarantees,
derivatives and other applicable off–balance sheet positions – are risk-
weighted by multiplying the contractual amount by the appropriate credit
conversion factor to determine the on–balance sheet credit-equivalent
amount, which is then risk-weighted based on the same factors used for on–
balance sheet assets. Risk-weighted assets also incorporate a measure for the
market risk related to applicable trading assets–debt and equity instruments,
and foreign exchange and commodity derivatives. The resulting risk-weighted
values for each of the risk categories are then aggregated to determine total
risk-weighted assets.
(d) Includes off–balance sheet risk-weighted assets at December 31, 2010 and 2009,
of $282.9 billion and $367.4 billion, respectively. Risk-weighted assets are calcu-
lated in accordance with U.S. federal regulatory capital standards.
(e) Adjusted average assets, for purposes of calculating the leverage ratio,
include total average assets adjusted for unrealized gains/(losses) on securi-
ties, less deductions for disallowed goodwill and other intangible assets, in-
vestments in certain subsidiaries, and the total adjusted carrying value of
nonfinancial equity investments that are subject to deductions from Tier 1
capital.
The Firm’s Tier 1 common capital was $114.8 billion at December
31, 2010, compared with $105.3 billion at December 31, 2009, an
increase of $9.5 billion. The increase was predominantly due to net
income (adjusted for DVA) of $17.0 billion and net issuances and
commitments to issue common stock under the Firm’s employee
stock-based compensation plans of $2.8 billion. The increase was
partially offset by $4.4 billion of cumulative effect adjustments to
retained earnings that predominantly resulted from the adoption of
new accounting guidance related to VIEs; $3.0 billion of common
stock repurchases; $1.5 billion of dividends on common and pre-
ferred stock; and a $1.3 billion reduction related to the purchase of
the remaining interest in a consolidated subsidiary from noncon-
trolling shareholders. The Firm’s Tier 1 capital was $142.5 billion at
December 31, 2010, compared with $133.0 billion at December
31, 2009, an increase of $9.5 billion. The increase in Tier 1 capital
reflected the increase in Tier 1 common and a net issuance of trust
preferred capital debt securities, offset by the redemption of pre-
ferred stock.
For additional information regarding federal regulatory capital
requirements and capital ratios of the Firm and the Firm’s signifi-
cant banking subsidiaries at December 31, 2010 and 2009, see
Note 29 on pages 273–274 of this Annual Report.
Basel II
The minimum risk-based capital requirements adopted by the U.S.
federal banking agencies follow the Capital Accord of the Basel
Committee on Banking Supervision (“Basel I”). In 2004, the Basel
Committee published a revision to the Accord (“Basel II”). The goal
of the Basel II Framework is to provide more risk-sensitive regula-
tory capital calculations and promote enhanced risk management
practices among large, internationally active banking organizations.
U.S. banking regulators published a final Basel II rule in December
2007, which requires JPMorgan Chase to implement Basel II at the
holding company level, as well as at certain of its key U.S. bank
subsidiaries.
Prior to full implementation of the new Basel II Framework, JPMor-
gan Chase is required to complete a qualification period of four
consecutive quarters during which it needs to demonstrate that it
meets the requirements of the rule to the satisfaction of its primary
U.S. banking regulators. The U.S. implementation timetable con-
sists of the qualification period, starting no later than April 1, 2010,
followed by a minimum transition period of three years. During the
transition period, Basel II risk-based capital requirements cannot
fall below certain floors based on current Basel l regulations.
JPMorgan Chase is currently in the qualification period and expects
to be in compliance with all relevant Basel II rules within the estab-
lished timelines. In addition, the Firm has adopted, and will con-