JP Morgan Chase 2015 Annual Report Download - page 166

Management’s discussion and analysis
156 JPMorgan Chase & Co./2015 Annual Report
Internal Capital Adequacy Assessment Process
Semiannually, the Firm completes the ICAAP, which provides
management with a view of the impact of severe and
unexpected events on earnings, balance sheet positions,
reserves and capital. The Firm’s ICAAP integrates stress
testing protocols with capital planning.
The process assesses the potential impact of alternative
economic and business scenarios on the Firm’s earnings and
capital. Economic scenarios, and the parameters underlying
those scenarios, are defined centrally and applied uniformly
across the businesses. These scenarios are articulated in
terms of macroeconomic factors, which are key drivers of
business results; global market shocks, which generate
short-term but severe trading losses; and idiosyncratic
operational risk events. The scenarios are intended to
capture and stress key vulnerabilities and idiosyncratic risks
facing the Firm. However, when defining a broad range of
scenarios, realized events can always be worse. Accordingly,
management considers additional stresses outside these
scenarios, as necessary. ICAAP results are reviewed by
management and the Board of Directors.
Line of business equity
The Firm’s framework for allocating capital to its business
segments (line of business equity) is based on the following
objectives:
• Integrate firmwide and line of business capital
management activities;
• Measure performance consistently across all lines of
business; and
• Provide comparability with peer firms for each of the
lines of business.
Each business segment is allocated capital by taking into
consideration stand-alone peer comparisons, regulatory
capital requirements (as estimated under Basel III Advanced
Fully Phased-In) and economic risk. Capital is also allocated
to each line of business for, among other things, goodwill
and other intangibles associated with acquisitions effected
by the line of business. ROE is measured and internal
targets for expected returns are established as key
measures of a business segment’s performance.
Line of business equity Yearly average
Year ended December 31,
(in billions) 2015 2014 2013
Consumer & Community Banking $ 51.0 $ 51.0 $ 46.0
Corporate & Investment Bank 62.0 61.0 56.5
Commercial Banking 14.0 14.0 13.5
Asset Management 9.0 9.0 9.0
Corporate 79.7 72.4 71.4
Total common stockholders’ equity $ 215.7 $ 207.4 $ 196.4
On at least an annual basis, the Firm assesses the level of
capital required for each line of business as well as the
assumptions and methodologies used to allocate capital.
The line of business equity allocations are updated as
refinements are implemented. The table below reflects the
Firm’s assessed level of capital required for each line of
business as of the dates indicated.
Line of business equity January 1,
2016
December 31,
(in billions) 2015 2014
Consumer & Community Banking $ 51.0 $ 51.0 $ 51.0
Corporate & Investment Bank 64.0 62.0 61.0
Commercial Banking 16.0 14.0 14.0
Asset Management 9.0 9.0 9.0
Corporate 81.5 85.5 76.7
Total common stockholders’
equity $ 221.5 $ 221.5 $ 211.7
Other capital requirements
Minimum Total Loss Absorbing Capacity
In November 2015, the Financial Stability Board (“FSB”)
finalized the TLAC standard for GSIBs, which establishes the
criteria for TLAC eligible debt and capital instruments and
defines the minimum requirements for amounts of loss
absorbing and recapitalization capacity. This amount and
type of debt and capital instruments is intended to
effectively absorb losses, as necessary, upon the failure of a
GSIB, without imposing such losses on taxpayers of the
relevant jurisdiction or causing severe systemic disruptions,
and thereby ensuring the continuity of the GSIB’s critical
functions. The final standard will require GSIBs to meet a
common minimum TLAC requirement of 16% of the
financial institution’s RWA, effective January 1, 2019, and
at least 18% effective January 1, 2022. The minimum TLAC
must also be at least 6% of a financial institution’s Basel III
leverage ratio denominator, effective January 1, 2019, and
at least 6.75% effective January 1, 2022.
On October 30, 2015, the Federal Reserve issued proposed
rules that would require the top-tier holding companies of
eight U.S. global systemically important bank holding
companies, including the Firm, among other things, to
maintain minimum levels of eligible TLAC and long-term
debt satisfying certain eligibility criteria (“eligible LTD”)
commencing January 1, 2019. Under the proposal, these
eight U.S GSIBs would be required to maintain
minimum TLAC of no less than 18% of the financial
institution’s RWA or 9.5% of its leverage exposure (as
defined by the rules), plus in the case of the RWA-based
measure, a TLAC buffer that is equal to 2.5% of the
financial institution’s CET1, any applicable countercyclical
buffer and the financial institution’s GSIB surcharge as
calculated under method 1. The minimum level of eligible
LTD that would be required to be maintained by these eight
U.S. GSIBs would be equal to the greater of (A) 6% of the
financial institution’s RWA, plus the higher of the method 1
or method 2 GSIB surcharge applicable to the institution
and (B) 4.5% of its leverage exposure (as defined by the
rules). These proposed TLAC Rules would disqualify from
eligible LTD, among other instruments, senior debt
securities that permit acceleration for reasons other than
insolvency or payment default, as well as structured notes
and debt securities not governed by U.S. law. The Firm is
currently evaluating the impact of the proposal.