JP Morgan Chase 2010 Annual Report Download - page 111

JPMorgan Chase & Co./2010 Annual Report 111
The Firm closely monitors the ability of the parent holding company
to meet all of its obligations with liquid sources of cash or cash
equivalents for an extended period of time without access to the
unsecured funding markets. The Firm targets pre-funding of parent
holding company obligations for at least 12 months; however, due
to conservative liquidity management actions taken by the Firm in
the current environment, the current pre-funding of such obliga-
tions is significantly greater than target.
Global Liquidity Reserve
In addition to the parent holding company, the Firm maintains a
significant amount of liquidity – primarily at its bank subsidiaries, but
also at its nonbank subsidiaries. The Global Liquidity Reserve repre-
sents consolidated sources of available liquidity to the Firm, including
cash on deposit at central banks, and cash proceeds reasonably
expected to be received in secured financings of highly liquid, unen-
cumbered securities – such as government-issued debt, government-
and FDIC-guaranteed corporate debt, U.S. government agency debt
and agency mortgage-backed securities (“MBS”). The liquidity
amount anticipated to be realized from secured financings is based
on management’s current judgment and assessment of the Firm’s
ability to quickly raise secured financings. The Global Liquidity Re-
serve also includes the Firm’s borrowing capacity at various FHLBs,
the Federal Reserve Bank discount window and various other central
banks from collateral pledged by the Firm to such banks. Although
considered as a source of available liquidity, the Firm does not view
borrowing capacity at the Federal Reserve Bank discount window and
various other central banks as a primary source of funding. As of
December 31, 2010, the Global Liquidity Reserve was approximately
$262 billion.
In addition to the Global Liquidity Reserve, the Firm has significant
amounts of other high-quality, marketable securities available to
raise liquidity, such as corporate debt and equity securities.
Basel III
On December 16, 2010, the Basel Committee published the final
Basel III rules pertaining to capital and liquidity requirements, includ-
ing minimum standards for short-term liquidity coverage – the liquid-
ity coverage ratio (the “LCR”) – and term funding – the net stable
funding ratio (the “NSFR”). These minimum standards will be phased
in over time. The observation period for both the LCR and the NSFR
commences in 2011, with implementation in 2015 and 2018, respec-
tively. For more information, see the discussion on Basel III on page
104 of this Annual Report.
Funding
Sources of funds
A key strength of the Firm is its diversified deposit franchise, through
the RFS, CB, TSS and AM lines of business, which provides a stable
source of funding and decreases reliance on the wholesale markets.
As of December 31, 2010, total deposits for the Firm were $930.4
billion, compared with $938.4 billion at December 31, 2009. Aver-
age total deposits for the Firm were $881.1 billion during 2010,
compared with $882.0 billion during 2009. The Firm typically experi-
ences higher deposit balances at period ends driven by higher sea-
sonal customer deposit inflows. A significant portion of the Firm’s
deposits are retail deposits (40% and 38% at December 31, 2010
and 2009, respectively), which are considered particularly stable as
they are less sensitive to interest rate changes or market volatility. A
significant portion of the Firm’s wholesale deposits are also consid-
ered stable sources of funding due to the nature of the relationships
from which they are generated, particularly customers’ operating
service relationships with the Firm. As of December 31, 2010, the
Firm’s deposits-to-loans ratio was 134%, compared with 148% at
December 31, 2009. The decline in the Firm’s deposits-to-loans ratio
was predominately due to an increase in loans resulting from the
January 1, 2010, implementation of new accounting guidance re-
lated to VIEs. The impact of the new accounting guidance on the
deposits-to-loans ratio was partially offset by continued attrition of
the heritage Washington Mutual residential loan and credit card loan
portfolios. For further discussions of deposit and liability balance
trends, see the discussion of the results for the Firm’s business
segments and the Balance Sheet Analysis on pages 69–88 and 92–
94, respectively, of this Annual Report. For a more detailed discus-
sion of the adoption of the new accounting guidance, see Note 1 on
pages 164–165 of this Annual Report.
Additional sources of funding include a variety of unsecured and
secured short-term and long-term instruments. Short-term unsecured
funding sources include federal funds and Eurodollars purchased,
certificates of deposit, time deposits, commercial paper and bank
notes. Long-term unsecured funding sources include long-term debt,
trust preferred capital debt securities, preferred stock and common
stock.