JP Morgan Chase 2013 Annual Report Download - page 170

Management’s discussion and analysis
176 JPMorgan Chase & Co./2013 Annual Report
The purpose of these sensitivity analyses is to provide an
indication of the isolated impacts of hypothetical alternative
assumptions on modeled loss estimates. The changes in the
inputs presented above are not intended to imply
management’s expectation of future deterioration of those
risk factors.
These analyses are not intended to estimate changes in the
overall allowance for loan losses, which would also be
influenced by the judgment management applies to the
modeled loss estimates to reflect the uncertainty and
imprecision of these modeled loss estimates based on then
current circumstances and conditions.
It is difficult to estimate how potential changes in specific
factors might affect the allowance for credit losses because
management considers a variety of factors and inputs in
estimating the allowance for credit losses. Changes in these
factors and inputs may not occur at the same rate and may
not be consistent across all geographies or product types,
and changes in factors may be directionally inconsistent,
such that improvement in one factor may offset
deterioration in other factors. In addition, it is difficult to
predict how changes in specific economic conditions or
assumptions could affect borrower behavior or other
factors considered by management in estimating the
allowance for credit losses. Given the process the Firm
follows in evaluating the risk factors related to its loans,
including risk ratings, home price assumptions, and credit
card loss estimates, management believes that its current
estimate of the allowance for credit loss is appropriate.
Fair value of financial instruments, MSRs and commodities
inventory
JPMorgan Chase carries a portion of its assets and liabilities
at fair value. The majority of such assets and liabilities are
measured at fair value on a recurring basis. Certain assets
and liabilities are measured at fair value on a nonrecurring
basis, including certain mortgage, home equity and other
loans, where the carrying value is based on the fair value of
the underlying collateral.
Assets measured at fair value
The following table includes the Firm’s assets measured at
fair value and the portion of such assets that are classified
within level 3 of the valuation hierarchy. For further
information, see Note 3 on pages 195–215 of this
Annual Report.
December 31, 2013
(in billions, except ratio data) Total assets at fair value Total level 3 assets
Trading debt and equity instruments $ 308.9 $ 27.2
Derivative receivables 65.8 18.6
Trading assets 374.7 45.8
AFS securities 330.0 2.3 (a)
Loans 2.0 1.9
MSRs 9.6 9.6
Private equity investments 7.5 6.5
Other 36.5 3.2
Total assets measured at fair value on
a recurring basis 760.3 69.3
Total assets measured at fair value on a
nonrecurring basis 6.2 5.8
Total assets measured at fair value $ 766.5 $ 75.1
Total Firm assets $ 2,415.7
Level 3 assets as a percentage of total
Firm assets 3.1% (a)
Level 3 assets as a percentage of total
Firm assets at fair value 9.8% (a)
(a) Reflects $27.4 billion of collateralized loan obligations (“CLOs”) transferred from
level 3 to level 2 during the year ended December 31, 2013. For further discussion
of the transfers, see Note 3 on pages 195–215 of this Annual Report.
Valuation
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date. The Firm has established well-
documented processes for determining fair value; for
further details see Note 3 on pages 195–215 of this Annual
Report. Fair value is based on quoted market prices, where
available. If listed prices or quotes are not available for an
instrument or a similar instrument, fair value is generally
based on models that consider relevant transaction
characteristics (such as maturity) and use as inputs market-
based or independently sourced parameters.
Estimating fair value requires the application of judgment.
The type and level of judgment required is largely
dependent on the amount of observable market information
available to the Firm. For instruments valued using
internally developed models that use significant
unobservable inputs and are therefore classified within
level 3 of the valuation hierarchy, judgments used to
estimate fair value are more significant than those required
when estimating the fair value of instruments classified
within levels 1 and 2.