JP Morgan Chase 2010 Annual Report Download - page 30

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28
because the regulators tightened up the defini-
tions for all types of capital – rightly so – and
increased standards for the calculation of
risk-weighted assets (mostly for trading assets,
counterpartyexposuresandsecuritizations).
Basel III’s higher capital requirements
provide more than enough capacity to with-
standextremestress.Wedonotbelievethat
we should be required to hold even more
capital. The chart below presents a forward-
looking stress test on JPMorgan Chase’s
capital.Usinganalysts’estimates,weshow
what our Basel I and Basel III Tier 1 Capital
ratios would be. These are estimates, but
they give you a sense of the strength of our
capital generation, even under stress. A great
deal of detailed analysis goes into these tests,
including the assumptions that home prices
would drop another 15% from peak levels
and unemployment would go to 12%. This
stress test is a more severe case than in the
Federal Reserve’s stress test.
Sointhe“real”stresstestofthepastfew
years – one of the worst environments of all
time – JPMorgan Chase did fine. In forward-
looking stress tests, we are in excellent shape.
The whole purpose of capital is to be able to
protect the firm under conditions of extreme
stress.Weunderstandwhy,afterthiscrisis,
the capital standards should be increased.
Basel I Tier 1 Common Ratio Basel III Tier 1 Common Ratio
2013201220112010 201320122011 2013201220112010 201320122011
Tier 1
Common
Fed
Guideline:
5%
Analyst Projections “Stressed” Analyst Projections Analyst Projections “Stressed” Analyst Projections
9.8%
10.7%11.4%
12.2%
~10%
~11% ~12%
7% ~8%
~10%
~11%
~8%
~9%
~10%
2019
Basel III
Tier 1
Common
Guideline:
7%
1Q
2009
2Q
2009
3Q
2009
4Q
2009
1Q
2010
2Q
2010
3Q
2010
9.1% 9.6%
4Q
2010
9.5%
8.2%
8.8%
5.0
6.0
7.0
8.0
4.0
3.0
2.0
1.0
9.0
10.0%
7.3%
4Q
2008
7. 0 %
3Q
2008
6.8%
2Q
2008
7. 1 %
1Q
2008
6.9%
7.7%
JPMorgan Chase Quarterly Capital Levels
SCAP 1
Tier 1
Common
Guidelines:
4%
Feb. 10,
2009:
First Stress
Test
Announced
Nov. 17, 2010:
Second
Stress Test
Announced
9.8%
March 16,
2008:
Bear Stearns
Acquisition
Sept. 15, 2008:
Lehman Failure
Sept. 25, 2008:
WaMu
Acquisition
Basel I Tier 1 Common Ratio
SCAP = Supervisory Capital Assessment Program
As shown in the chart below, JPMorgan Chase maintained plenty of capital throughout the financial crisis.
JPMorgan Chase Quarterly Capital Levels