JP Morgan Chase 2012 Annual Report Download - page 150

Management’s discussion and analysis
160 JPMorgan Chase & Co./2012 Annual Report
the credit quality of the portfolio. For a further discussion of
the components of the allowance for credit losses, see
Critical Accounting Estimates Used by the Firm on pages
178–182 and Note 15 on pages 276–279 of this Annual
Report.
At least quarterly, the allowance for credit losses is
reviewed by the Chief Risk Officer, the Chief Financial
Officer and the Controller of the Firm, and discussed with
the Risk Policy and Audit Committees of the Board of
Directors of the Firm. As of December 31, 2012, JPMorgan
Chase deemed the allowance for credit losses to be
appropriate (i.e., sufficient to absorb probable credit losses
inherent in the portfolio).
The allowance for credit losses was $22.6 billion at
December 31, 2012, a decrease of $5.7 billion from $28.3
billion at December 31, 2011.
The consumer, excluding credit card, allowance for loan
losses decreased $4.0 billion from December 31, 2011,
predominantly due to a reduction in the allowance for the
non-PCI residential real estate portfolio, reflecting the
continuing trend of improving delinquencies and nonaccrual
loans (excluding the impact of Chapter 7 loans and junior
liens that are subordinate to senior liens that are 90 days or
more past due, which have been included in nonaccrual
loans beginning in 2012), which resulted in a lower level of
estimated losses based on the Firm’s base statistical loss
calculation. The allowance also included a $488 million
reduction attributable to a refinement of the loss estimates
associated with the Firm’s compliance with its obligations
under the global settlement, which reflected changes in
implementation strategies adopted in the second quarter of
2012. The adjustment to the base statistical loss calculation
that underlies the formula-based component of the
allowance for credit losses for the consumer, excluding
credit card, portfolio segment has declined over the past
two years, predominantly because specific risks covered by
this adjustment were subsequently incorporated into either
the base statistical loss calculation or asset-specific
reserves during that same time period.
The credit card allowance for loan losses decreased by $1.5
billion since December 31, 2011, due to reductions in both
the asset-specific allowance and the formula-based
allowance. The reduction in the asset-specific allowance,
which relates to loans restructured in TDRs, largely reflects
the changing profile of the TDR portfolio. The volume of
new TDRs, which have higher loss rates due to expected
redefaults, continues to decrease, and the loss rate on
existing TDRs is also decreasing over time as previously
restructured loans season and continue to perform. In
addition, effective June 30, 2012, the Firm changed its
policy for recognizing charge-offs on restructured loans that
do not comply with their modified payment terms based
upon guidance received from the banking regulators; this
policy change resulted in an acceleration of charge-offs
against the asset-specific allowance. For the year ended
December 31, 2012, the reduction in the formula-based
allowance was primarily driven by the continuing trend of
improving delinquencies and bankruptcies (which resulted
in a lower level of estimated losses based on the Firm’s
statistical loss calculation) and by lower levels of credit card
outstandings. The adjustment to the base statistical loss
calculation that underlies the formula-based component of
the allowance for credit losses for the credit card portfolio
segment has increased somewhat over the past two years,
primarily to consider current macroeconomic conditions
(including relatively high unemployment rates).
The wholesale allowance for loan losses decreased by $173
million since December 31, 2011. The decrease was driven
by recoveries, the restructuring of certain nonperforming
loans and other portfolio activity, as well as continued
improvements in the wholesale credit environment as
evidenced by lower charge-offs, non-accrual assets and
downgrade activity. The resulting decrease has been
partially offset by an increase in the adjustment to the base
statistical loss calculation in order to reflect inherent credit
losses that have not been captured by current credit metrics
and greater levels of uncertainty, due to the low level of
criticized assets and limited downgrade activity in the
portfolio.
For additional information about the credit quality of the
Firm’s loan portfolios, see Consumer Credit Portfolio on
pages 138–149, Wholesale Credit Portfolio on pages 150–
159, and Note 14 on pages 250–275 of this Annual Report.
The allowance for lending-related commitments for both the
consumer, excluding credit card, and wholesale portfolios,
which is reported in other liabilities, was $668 million and
$673 million at December 31, 2012 and 2011,
respectively.
The credit ratios in the following table are based on
retained loan balances, which exclude loans held-for-sale
and loans accounted for at fair value.