JP Morgan Chase 2013 Annual Report Download - page 132

Management’s discussion and analysis
138 JPMorgan Chase & Co./2013 Annual Report
The credit derivatives used in credit portfolio management
activities do not qualify for hedge accounting under U.S.
GAAP; these derivatives are reported at fair value, with
gains and losses recognized in principal transactions
revenue. In contrast, the loans and lending-related
commitments being risk-managed are accounted for on an
accrual basis. This asymmetry in accounting treatment,
between loans and lending-related commitments and the
credit derivatives used in credit portfolio management
activities, causes earnings volatility that is not
representative, in the Firm’s view, of the true changes in
value of the Firm’s overall credit exposure.
The effectiveness of the Firm’s credit default swap (“CDS”)
protection as a hedge of the Firm’s exposures may vary
depending on a number of factors, including the named
reference entity (i.e., the Firm may experience losses on
specific exposures that are different than the named
reference entities in the purchased CDS), and the
contractual terms of the CDS (which may have a defined
credit event that does not align with an actual loss realized
by the Firm) and the maturity of the Firm’s CDS protection
(which in some cases may be shorter than the Firm’s
exposures). However, the Firm generally seeks to purchase
credit protection with a maturity date that is the same or
similar to the maturity date of the exposure for which the
protection was purchased, and remaining differences in
maturity are actively monitored and managed by the Firm.
Credit portfolio hedges
The following table sets out the fair value related to the
Firm’s credit derivatives used in credit portfolio
management activities, the fair value related to the CVA
(which reflects the credit quality of derivatives counterparty
exposure), as well as certain other hedges used in the risk
management of CVA. These results can vary from period-to-
period due to market conditions that affect specific
positions in the portfolio.
Net gains and losses on credit portfolio hedges
Year ended December 31,
(in millions) 2013 2012 2011
Hedges of loans and lending-
related commitments $ (142) $ (163) $ (32)
CVA and hedges of CVA (130) 127 (769)
Net gains/(losses) $ (272) $ (36) $ (801)
COMMUNITY REINVESTMENT ACT EXPOSURE
The Community Reinvestment Act (“CRA”) encourages
banks to meet the credit needs of borrowers in all segments
of their communities, including neighborhoods with low or
moderate incomes. The Firm is a national leader in
community development by providing loans, investments
and community development services in communities
across the United States.
At December 31, 2013 and 2012, the Firm’s CRA loan
portfolio was approximately $18 billion and $16 billion,
respectively. At December 31, 2013 and 2012, 50% and
62%, respectively, of the CRA portfolio were residential
mortgage loans; 26% and 13%, respectively, were
commercial real estate loans; 16% and 18%, respectively,
were business banking loans; and 8% and 7%, respectively,
were other loans. CRA nonaccrual loans were 3% and 4%,
respectively, of the Firm’s total nonaccrual loans. For the
years ended December 31, 2013 and 2012, net charge-offs
in the CRA portfolio were 1% and 3%, respectively, of the
Firm’s net charge-offs in both years.