JP Morgan Chase 2014 Annual Report Download - page 149

JPMorgan Chase & Co./2014 Annual Report 147
Prior to the implementation of Basel III Advanced, the Firm
was required to complete a qualification period (“parallel
run”) during which it needed to demonstrate that it met the
requirements of the rule to the satisfaction of its U.S.
banking regulators. On February 21, 2014, the Federal
Reserve and the OCC informed the Firm and its national
bank subsidiaries that they had satisfactorily completed the
parallel run requirements and were approved to calculate
capital under Basel III Advanced, in addition to Basel III
Standardized, as of April 1, 2014. In conjunction with its
exit from the parallel run, the capital adequacy of the Firm
and its national bank subsidiaries is evaluated against the
Basel III approach (Standardized or Advanced) which
results, for each quarter beginning with the second quarter
of 2014, in the lower ratio (the “Collins Floor”), as required
by the Collins Amendment of the Dodd-Frank Act.
Definition of capital
Basel III revises Basel I and II by narrowing the definition of
capital and increasing the capital requirements for specific
exposures. Under Basel III, CET1 capital predominantly
includes common stockholders’ equity (including capital for
AOCI related to debt and equity securities classified as AFS
as well as for defined benefit pension and other post-
retirement employee benefit (“OPEB”) plans), less certain
deductions for goodwill, MSRs and deferred tax assets that
arise from net operating loss (“NOL”) and tax credit
carryforwards. Tier 1 capital is predominantly comprised of
CET1 capital as well as perpetual preferred stock. Tier 2
capital includes long-term debt qualifying as Tier 2 and
qualifying allowance for credit losses. Total capital is Tier 1
capital plus Tier 2 capital. The revisions to CET1 capital,
Tier 1 capital and Tier 2 capital are subject to phase-in
periods that began January 1, 2014, and continue through
the end of 2018, and during that period, CET1 capital, Tier
1 capital and Tier 2 capital represent Basel III Transitional
capital.
Risk-weighted assets
Basel III establishes two comprehensive methodologies for
calculating RWA (a Standardized approach and an
Advanced approach) which include capital requirements for
credit risk, market risk, and in the case of Basel III
Advanced, also operational risk. Key differences in the
calculation of credit risk RWA between the Standardized
and Advanced approaches are that for Basel III Advanced,
credit risk RWA is based on risk-sensitive approaches which
largely rely on the use of internal credit models and
parameters, whereas for Basel III Standardized, credit risk
RWA is generally based on supervisory risk-weightings
which vary primarily by counterparty type and asset class.
Market risk RWA is calculated on a generally consistent
basis between Basel III Standardized and Basel III
Advanced, both of which incorporate the requirements set
forth in Basel 2.5. In addition to the RWA calculated under
these methodologies, the Firm may supplement such
amounts to incorporate management judgment and
feedback from its bank regulators.
Supplementary leverage ratio (“SLR”)
Basel III also includes a requirement for Advanced
Approach banking organizations, including the Firm, to
calculate a SLR. The SLR, a non-GAAP financial measure, is
defined as Tier 1 capital under Basel III divided by the
Firm’s total leverage exposure. Total leverage exposure is
calculated by taking the Firm’s total average on-balance
sheet assets, less amounts permitted to be deducted for
Tier 1 capital, and adding certain off-balance sheet
exposures, such as undrawn commitments and derivatives
potential future exposure.
On September 3, 2014, the U.S. banking regulators
adopted a final rule for the calculation of the SLR. The U.S.
final rule requires public disclosure of the SLR beginning
with the first quarter of 2015, and also requires U.S. bank
holding companies, including the Firm, to have a minimum
SLR of at least 5% and IDI subsidiaries, including JPMorgan
Chase Bank, N.A. and Chase Bank USA, N.A., to have a
minimum SLR of at least 6%, both beginning January 1,
2018.