JP Morgan Chase 2015 Annual Report Download - page 161

JPMorgan Chase & Co./2015 Annual Report 151
Strategy and governance
The Firm’s CEO, in conjunction with the Board of Directors,
establishes principles and guidelines for capital planning,
issuance, usage and distributions, and establishes capital
targets for the level and composition of capital in both
business-as-usual and highly stressed environments.
The Firm’s senior management recognizes the importance
of a capital management function that supports strategic
decision-making. The Capital Governance Committee and
the Regulatory Capital Management Office (“RCMO”) are
key components in support of this objective. The Capital
Governance Committee is responsible for reviewing the
Firm’s Capital Management Policy and the principles
underlying capital issuance and distribution alternatives.
The Committee is also responsible for governing the capital
adequacy assessment process, including overall design,
assumptions and risk streams, and ensuring that capital
stress test programs are designed to adequately capture the
idiosyncratic risks across the Firm’s businesses. RCMO,
which reports to the Firm’s CFO, is responsible for
reviewing, approving and monitoring the implementation of
the Firm’s capital policies and strategies, as well as its
capital adequacy assessment process. The review assesses
the effectiveness of the capital adequacy process, the
appropriateness of the risk tolerance levels, and the
strength of the control infrastructure. The DRPC oversees
the Firm’s capital adequacy process and its components.
The Basel Independent Review function (“BIR”), which
reports to the RCMO and the Capital Governance
Committee, conducts independent assessments of the Firm’s
regulatory capital framework to ensure compliance with the
applicable U.S. Basel rules in support of the DRPC’s and
senior management’s oversight of the Firm’s capital
processes. For additional discussion on the DRPC, see
Enterprise-wide Risk Management on pages 107–111.
Monitoring and management of capital
In its monitoring and management of capital, the Firm takes
into consideration an assessment of economic risk and all
regulatory capital requirements to determine the level of
capital needed to meet and maintain the objectives
discussed above, as well as to support the framework for
allocating capital to its business segments. While economic
risk is considered prior to making decisions on future
business activities, in most cases, the Firm considers risk-
based regulatory capital to be a proxy for economic risk
capital.
Regulatory capital
The Federal Reserve establishes capital requirements,
including well capitalized standards, for the consolidated
financial holding company. The OCC establishes similar
minimum capital requirements for the Firm’s national
banks, including JPMorgan Chase Bank, N.A. and
Chase Bank USA, N.A.
The U.S. capital requirements generally follow the Capital
Accord of the Basel Committee, as amended from time to
time. Prior to January 1, 2014, the Firm and its banking
subsidiaries were subject to the capital requirements of
Basel I and Basel 2.5. Effective January 1, 2014, the Firm
became subject to Basel III (which incorporates Basel 2.5).
Basel III overview
Basel III capital rules, for large and internationally active
U.S. bank holding companies and banks, including the Firm
and its insured depository institution (“IDI”) subsidiaries,
revised, among other things, the definition of capital and
introduced a new CET1 capital requirement. Basel III
presents two comprehensive methodologies for calculating
RWA, a general (Standardized) approach, which replaced
Basel I RWA effective January 1, 2015 (“Basel III
Standardized”) and an advanced approach, which replaced
Basel II RWA (“Basel III Advanced”); and sets out minimum
capital ratios and overall capital adequacy standards.
Certain of the requirements of Basel III are subject to
phase-in periods that began on January 1, 2014 and
continue through the end of 2018 (“transitional period”).
The capital adequacy of the Firm and its national bank
subsidiaries is evaluated against the Basel III approach
(Standardized or Advanced) which results in the lower ratio
(the “Collins Floor”), as required by the Collins Amendment
of the Dodd-Frank Act.
Basel III establishes capital requirements for calculating
credit risk and market risk RWA, and in the case of Basel III
Advanced, operational risk RWA. 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.
Basel III also includes a requirement for Advanced
Approach banking organizations, including the Firm, to
calculate a Supplementary Leverage Ratio (“SLR”). For
additional information on SLR, see page 155.
Basel III Fully Phased-In
Basel III capital rules will become fully phased-in on January
1, 2019, at which point the Firm will continue to calculate
its capital ratios under both the Basel III Standardized and
Advanced Approaches. While the Firm has imposed Basel III
Standardized Fully Phased-In RWA limits on its lines of
business, the Firm continues to manage each of the
businesses (including line of business equity allocations), as
well as the corporate functions, primarily on a Basel III
Advanced Fully Phased-In basis.
The Firm’s capital, RWA and capital ratios that are
presented under Basel III Standardized and Advanced Fully
Phased-In rules and the Firm’s and JPMorgan Chase Bank,
N.A.’s and Chase Bank USA, N.A.’s SLRs calculated under the
Basel III Advanced Fully Phased-In rules are non-GAAP
financial measures. However, such measures are used by
banking regulators, investors and analysts to assess the