JP Morgan Chase 2012 Annual Report Download - page 106

Management’s discussion and analysis
116 JPMorgan Chase & Co./2012 Annual Report
CAPITAL MANAGEMENT
A strong capital position is essential to the Firm’s business
strategy and competitive position. The Firm’s capital
strategy focuses on long-term stability, which enables the
Firm to build and invest in market-leading businesses, even
in a highly stressed environment. Prior to making any
decisions on future business activities, senior management
considers the implications on the Firm’s capital strength. In
addition to considering the Firm’s earnings outlook, senior
management evaluates all sources and uses of capital with
a view to preserving the Firm’s capital strength. Maintaining
a strong balance sheet to manage through economic
volatility is considered a strategic imperative by the Firm’s
Board of Directors, CEO and Operating Committee. The
Firm’s balance sheet philosophy focuses on risk-adjusted
returns, strong capital and reserves, and robust liquidity.
The Firm’s capital management objectives are to hold
capital sufficient to:
• Cover all material risks underlying the Firm’s business
activities;
• Maintain “well-capitalized” status under regulatory
requirements;
• Maintain debt ratings that enable the Firm to optimize its
funding mix and liquidity sources while minimizing costs;
• Retain flexibility to take advantage of future investment
opportunities; and
• Build and invest in businesses, even in a highly stressed
environment.
These objectives are achieved through ongoing monitoring
of the Firm’s capital position, regular stress testing, and a
capital governance framework. Capital management is
intended to be flexible in order to react to a range of
potential events. JPMorgan Chase has frequent firmwide
and LOB processes for ongoing monitoring and active
management of its capital position.
Capital governance
The Firm’s senior management recognizes the importance
of a capital management function that supports strategic
decision-making. The Firm has established the Regulatory
Capital Management Office (“RCMO”) which is responsible
for measuring, monitoring and reporting the Firm’s capital
and related risks. The RCMO is an integral component of the
Firm’s overall capital governance framework and is
responsible for reviewing, approving and monitoring the
implementation of the Firm’s capital policies and strategies,
as well as its capital adequacy assessment process. The
Board’s Risk Policy Committee assesses the capital
adequacy assessment process and its components. This
review encompasses evaluating the effectiveness of the
capital adequacy process, the appropriateness of the risk
tolerance levels, and the strength of the control
infrastructure. For additional discussion on the Board’s Risk
Policy Committee, see Risk Management on pages 123–126
of this Annual Report.
Internal Capital Adequacy Assessment Process
Semiannually, the Firm completes the Internal Capital
Adequacy Assessment Process (“ICAAP”), which provides
management with a view of the impact of severe and
unexpected events on earnings, balance sheet positions,
reserves and capital. The Firm’s ICAAP integrates stress
testing protocols with capital planning.
The process assesses the potential impact of alternative
economic and business scenarios on the Firm’s earnings and
capital. Economic scenarios, and the parameters underlying
those scenarios, are defined centrally and applied uniformly
across the businesses. These scenarios are articulated in
terms of macroeconomic factors, which are key drivers of
business results; global market shocks, which generate
short-term but severe trading losses; and idiosyncratic
operational risk events. The scenarios are intended to
capture and stress key vulnerabilities and idiosyncratic risks
facing the Firm. However, when defining a broad range of
scenarios, realized events can always be worse. Accordingly,
management considers additional stresses outside these
scenarios, as necessary. ICAAP results are reviewed by
management and the Board of Directors.
Comprehensive Capital Analysis and Review (“CCAR”)
The Federal Reserve requires large bank holding
companies, including the Firm, to submit a capital plan on
an annual basis. The Federal Reserve uses the CCAR and
Dodd-Frank Act Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) stress test processes
to ensure that large bank holding companies have sufficient
capital during periods of economic and financial stress, and
have robust, forward-looking capital assessment and
planning processes in place that address each bank holding
company’s unique risks to enable them to have the ability to
absorb losses under certain stress scenarios. Through the
CCAR, the Federal Reserve evaluates each bank holding
company’s capital adequacy and internal capital adequacy
assessment processes, as well as its plans to make capital
distributions, such as dividend payments or stock
repurchases.
The Firm’s CCAR process is integrated into and employs the
same methodologies utilized in the Firm’s ICAAP process
described above. The Firm submitted its 2012 capital plan
on January 9, 2012, and received notice of the Federal
Reserve’s non-objection on March 13, 2012. The Firm
increased the quarterly dividend on its common equity to
$0.30 per share commencing in the first quarter of 2012,
and during 2012 repurchased (on a trade-date basis) 31
million shares of common stock and 18 million warrants for
$1.3 billion and $238 million, respectively. Following the
voluntary cessation of its common equity repurchase
program in May 2012, the Firm resubmitted its capital plan
to the Federal Reserve under the 2012 CCAR process in
August 2012. Pursuant to a non-objection received from
the Federal Reserve on November 5, 2012, with respect to
the resubmitted capital plan, the Firm is authorized to