JP Morgan Chase 2014 Annual Report Download - page 27

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III. A NEW GLOBAL FINANCIAL ARCHITECTURE
We hope to learn a lot more about the G-SIB
calculations. Many questions remain, which
we hope will be answered over time such as:
• It is unclear (it has not been made trans-
parent to us) how and why these calcula-
tions are supposed to reflect systemic risk.
In addition, they are relative calculations,
which means that even if we and every-
body else all reduced these exposures,
our surcharge would not change, while
presumably systemic risk would drop.
• It is unclear how these calculations take
into consideration the extensive number
of new rules and regulations that are
supposed to reduce systemic risk (i.e., total
loss-absorbing capacity, net stable funding
ratio, liquidity coverage ratio, supplemen-
tary leverage ratio and the new Recovery
& Resolution rules).
• It is unclear why the U.S. regulators
doubled the calculations versus everyone
else in the world, particularly since the
U.S. banking system, as a percentage of
the U.S. economy, is smaller than in most
other countries.
G-SIB is important, and we take it seriously. The
G-SIB capital surcharge, however calculated,
is an important part of our capital needs.
And since we are outsized, relative to our
competitors (our capital surcharge currently
is estimated as 4.5% of risk-weighted assets,
yet many of our competitors are between
2%-4% of risk-weighted assets), we will be
more comfortable when the surcharge is
reduced. We already have begun to lower the
surcharge by 0.5%, and, over time, expect
to do more than that. Marianne Lake and
Daniel Pinto gave details on this topic in
their Investor Day presentations. The regula-
tors have made it clear that these are impor-
tant measures of global systemic risk, and
they have given us a clear road map to how
we can reduce these exposures – and we are
going to take that road.
We must and will meet the regulators’
demands on Recovery & Resolution —
whatever it takes
A critical part of eliminating “Too Big to
Fail” is meeting the regulators’ demands on
Recovery & Resolution. The Recovery Plan
is the first line of defense in a crisis situ-
ation and serves as the road map for how
to prevent the firm from actually failing. It
gives the regulators the comfort that the firm
has done sucient upfront planning and
analysis and has an outline for how the firm
could recover if confronted with a severe
financial crisis. The plan essentially helps the
regulators understand the comprehensive
set of alternatives and actions available to
enable the firm to fully recover and prevent a
failure. Resolution Plans, on the other hand,
are the playbooks for how the company can
be restructured or unwound in an orderly
way in the event of a failure so that other
banks and the general economy would not
suer. The plans outline for the regulators a
set of strategies, necessary information and
detailed plans by legal entity. For instance,
JPMorgan Chase has reported that it has 34
legal entities and branches housing the vast
majority of the firm’s essential operations
and businesses. Each legal entity has to be
understood by the regulators and must have
distinct intercompany agreements and a
comprehensive plan in place to manage the
legal entity in the event that it needs to be
resolved. We have taken these requirements
very seriously as evidenced by the more than
1,000 people working diligently on the exten-
sive Recovery & Resolution requirements.
In addition, we are working to reduce the
number of entities we have and to simplify
our structure and inter-entity arrangements.
We need to satisfy all of our regulators on
these plans, and we will do whatever it takes
to meet their expectations.
There have been two critical developments
toward giving governments and regula-
tors comfort on Recovery & Resolution,
which, according to some key regulators,
will eectively end Too Big to Fail and will