JP Morgan Chase 2013 Annual Report Download - page 162

Management’s discussion and analysis
168 JPMorgan Chase & Co./2013 Annual Report
LIQUIDITY RISK MANAGEMENT
Liquidity risk management is intended to ensure that the
Firm has the appropriate amount, composition and tenor of
funding and liquidity in support of its assets. The primary
objectives of effective liquidity management are to ensure
that the Firm’s core businesses are able to operate in
support of client needs and meet contractual and
contingent obligations through normal economic cycles, as
well as during market stress events, and to maintain debt
ratings that enable the Firm to optimize its funding mix and
liquidity sources while minimizing costs.
The Firm manages liquidity and funding using a centralized,
global approach in order to optimize liquidity sources and
uses for the Firm as a whole, monitor exposures, identify
constraints on the transfer of liquidity among legal entities
within the Firm, and maintain the appropriate amount of
surplus liquidity as part of the Firm’s overall balance sheet
management strategy.
In the context of the Firm’s liquidity management, Treasury
is responsible for:
• Measuring, managing, monitoring and reporting the
Firm’s current and projected liquidity sources and uses;
• Understanding the liquidity characteristics of the Firm’s
assets and liabilities;
• Defining and monitoring firmwide and legal entity
liquidity strategies, policies, guidelines, and contingency
funding plans;
• Liquidity stress testing under a variety of adverse
scenarios
• Managing funding mix and deployment of excess short-
term cash;
• Defining and implementing funds transfer pricing
(“FTP”) across all lines of business and regions; and
• Defining and addressing the impact of regulatory
changes on funding and liquidity.
The Firm has a liquidity risk governance framework to
review, approve and monitor the implementation of liquidity
risk policies at the firmwide, regional and line of business
levels.
Specific risk committees responsible for liquidity risk
governance include ALCO as well as lines of business and
regional asset and liability management committees, and
the CTC Risk Committee. For further discussion of the risk
committees, see Enterprise-wide Risk Management on
pages 113–173 of this Annual Report. In addition, during
2013, the Firm established an independent liquidity risk
oversight function reporting into the CIO, Treasury and
Corporate (“CTC”) CRO, which provides independent
assessments and monitoring of liquidity risk across the
Firm.
Management considers the Firm’s liquidity position to be
strong as of December 31, 2013, and believes that the
Firm’s unsecured and secured funding capacity is sufficient
to meet its on- and off-balance sheet obligations.
LCR and NSFR
In December 2010, the Basel Committee introduced two
new measures of liquidity risk: the liquidity coverage ratio
(“LCR”), which is intended to measure the amount of “high-
quality liquid assets” (“HQLA”) held by the Firm in relation
to estimated net cash outflows within a 30-day period
during an acute stress event; and the net stable funding
ratio (“NSFR”) which is intended to measure the “available”
amount of stable funding relative to the “required” amount
of stable funding over a one-year horizon. The standards
require that the LCR be no lower than 100% and the NSFR
be greater than 100%.
In January 2013, the Basel Committee introduced certain
amendments to the formulation of the LCR, and a revised
timetable to phase in the standard. The LCR will continue to
become effective on January 1, 2015, but the minimum
requirement will begin at 60%, increasing in equal annual
increments to reach 100% on January 1, 2019. At
December 31, 2013, the Firm was compliant with the Basel
III LCR. The LCR may fluctuate from period-to-period due to
normal flows from client activity.
On October 24, 2013, the U.S. banking regulators released
a proposal to implement a U.S. quantitative liquidity
requirement consistent with, but more conservative than,
Basel III LCR for large banks and bank holding companies
(“U.S. LCR”). The proposal also provides for an accelerated
transition period compared to that which is currently
required under the Basel III LCR rules. At December 31,
2013, the Firm was also compliant with the U.S. LCR based
on its current understanding of the proposed rules.
On January 12, 2014, the Basel Committee released
proposed revisions to the NSFR. Based on its current
understanding of the proposed revisions, the Firm was
compliant with the NSFR as of December 31, 2013.
Funding
Sources of funds
The Firm funds its global balance sheet through diverse
sources of funding including a stable deposit franchise as
well as secured and unsecured funding in the capital
markets. The Firm’s loan portfolio, aggregating
approximately $722.2 billion, net of allowance, at
December 31, 2013, is funded with a portion of the Firm’s
deposits (aggregating approximately $1,287.8 billion at
December 31, 2013), and through securitizations and, with
respect to a portion of the Firm’s real estate-related loans,
with secured borrowings from the Federal Home Loan
Banks. Deposits in excess of the amount utilized to fund
loans are primarily invested in the Firm’s investment
securities portfolio or deployed in cash or other short-term
liquid investments based on their interest rate and liquidity