JP Morgan Chase 2012 Annual Report Download - page 296

Notes to consolidated financial statements
306 JPMorgan Chase & Co./2012 Annual Report
Note 27 – Restrictions on cash and
intercompany funds transfers
The business of JPMorgan Chase Bank, National Association
(“JPMorgan Chase Bank, N.A.”) is subject to examination
and regulation by the Office of the Comptroller of the
Currency (“OCC”). The Bank is a member of the U.S. Federal
Reserve System, and its deposits in the U.S. are insured by
the FDIC.
The Board of Governors of the Federal Reserve System (the
“Federal Reserve”) requires depository institutions to
maintain cash reserves with a Federal Reserve Bank. The
average amount of reserve balances deposited by the Firm’s
bank subsidiaries with various Federal Reserve Banks was
approximately $5.6 billion and $4.4 billion in 2012 and
2011, respectively.
Restrictions imposed by U.S. federal law prohibit JPMorgan
Chase and certain of its affiliates from borrowing from
banking subsidiaries unless the loans are secured in
specified amounts. Such secured loans to the Firm or to
other affiliates are generally limited to 10% of the banking
subsidiary’s total capital, as determined by the risk-based
capital guidelines; the aggregate amount of all such loans is
limited to 20% of the banking subsidiary’s total capital.
The principal sources of JPMorgan Chase’s income (on a
parent company-only basis) are dividends and interest from
JPMorgan Chase Bank, N.A., and the other banking and
nonbanking subsidiaries of JPMorgan Chase. In addition to
dividend restrictions set forth in statutes and regulations,
the Federal Reserve, the OCC and the FDIC have authority
under the Financial Institutions Supervisory Act to prohibit
or to limit the payment of dividends by the banking
organizations they supervise, including JPMorgan Chase and
its subsidiaries that are banks or bank holding companies,
if, in the banking regulator’s opinion, payment of a dividend
would constitute an unsafe or unsound practice in light of
the financial condition of the banking organization.
At January 1, 2013, JPMorgan Chase’s banking subsidiaries
could pay, in the aggregate, $18.4 billion in dividends to
their respective bank holding companies without the prior
approval of their relevant banking regulators. The capacity
to pay dividends in 2013 will be supplemented by the
banking subsidiaries’ earnings during the year.
In compliance with rules and regulations established by U.S.
and non-U.S. regulators, as of December 31, 2012 and
2011, cash in the amount of $25.1 billion and $25.4
billion, respectively, and securities with a fair value of $0.7
billion and $16.1 billion, respectively, were segregated in
special bank accounts for the benefit of securities and
futures brokerage customers. In addition, as of
December 31, 2012 and 2011, the Firm had other
restricted cash of $3.4 billion and $4.2 billion, respectively,
primarily representing cash reserves held at non-U.S.
central banks and held for other general purposes.
Note 28 – Regulatory capital
The Federal Reserve establishes capital requirements,
including well-capitalized standards for the consolidated
financial holding company. The OCC establishes similar
capital requirements and standards for the Firm’s national
banks, including JPMorgan Chase Bank, N.A., and Chase
Bank USA, N.A.
There are two categories of risk-based capital: Tier 1 capital
and Tier 2 capital. Tier 1 capital consists of common
stockholders’ equity, perpetual preferred stock,
noncontrolling interests in subsidiaries and trust preferred
securities, less goodwill and certain other adjustments. Tier
2 capital consists of preferred stock not qualifying as Tier 1
capital, subordinated long-term debt and other instruments
qualifying as Tier 2 capital, and the aggregate allowance for
credit losses up to a certain percentage of risk-weighted
assets. Total capital is Tier 1 capital plus Tier 2 capital. Risk-
weighted assets (“RWA”) consist of on– and off–balance
sheet assets that are assigned to one of several broad risk
categories and weighted by factors representing 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, and derivatives,
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.
Under the risk-based capital guidelines of the Federal
Reserve, JPMorgan Chase is required to maintain minimum
ratios of Tier 1 and Total capital to risk-weighted assets, as
well as minimum leverage ratios (which are defined as Tier
1 capital divided by adjusted quarterly average assets).
Failure to meet these minimum requirements could cause
the Federal Reserve to take action. Banking subsidiaries
also are subject to these capital requirements by their
respective primary regulators. As of December 31, 2012
and 2011, JPMorgan Chase and all of its banking
subsidiaries were well-capitalized and met all capital
requirements to which each was subject.