A strong capital position is essential to the Firm’s business strategy and competitive position. The Firm’s capital strategy focuses on long-term stability, which enables the Firm to build and invest in market-leading businesses, even in a highly stressed environment. Prior to making any decisions on future business activities, senior management considers the implications on the Firm’s capital. In addition to considering the Firm’s earnings outlook, senior
management evaluates all sources and uses of capital with a view to preserving the Firm’s capital strength. Maintaining a strong balance sheet to manage through economic volatility is considered a strategic imperative by the Firm’s Board of Directors, CEO and Operating Committee. The Firm’s balance sheet philosophy focuses on risk-adjusted returns, strong capital and reserves, and robust liquidity.
The Firm’s capital management objectives are to hold capital sufficient to:
• Cover all material risks underlying the Firm’s business activities;
• Maintain “well-capitalized” status under regulatory requirements;
• Maintain debt ratings that enable the Firm to optimize its funding mix and liquidity sources while minimizing costs;
• Retain flexibility to take advantage of future investment opportunities;
• Maintain sufficient capital in order to continue to build and invest in its businesses through the cycle and in stressed environments; and
• Distribute excess capital to shareholders while balancing other stated objectives.
These objectives are achieved through ongoing monitoring of the Firm’s capital position, regular stress testing, and a capital governance framework. Capital management is intended to be flexible in order to react to a range of potential events. JPMorgan Chase has firmwide and LOB processes for ongoing monitoring and active management of its capital position.
Capital strategy and governance
The Firm’s CEO, in conjunction with the Board and its subcommittees, establish principles and guidelines for capital planning, capital issuance, usage and distributions, and establish 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 Firm has established the Capital Governance Committee and the Regulatory Capital
Management Office (“RCMO”) as 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 DRPC assesses the Firm’s capital adequacy process and its components. This review determines the effectiveness of the capital adequacy process, the appropriateness of the risk tolerance levels, and the strength of the control infrastructure. For additional discussion on the DRPC, see Enterprise-wide Risk Management on pages 105–109.
Capital disciplines
In its capital management, the Firm uses three primary disciplines, which are further described below:
• Regulatory capital
• Economic capital
• Line of business equity Regulatory capital
The Federal Reserve establishes capital requirements, including well-capitalized standards, for the consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital
requirements and standards for the Firm’s national banks, including JPMorgan Chase Bank, N.A. and
Chase Bank USA, N.A.
The U.S. capital requirements 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, for U.S. bank holding companies and banks, revises, among other things, the definition of capital and introduces a new common equity Tier 1 capital (“CET1 capital”) requirement; presents two comprehensive methodologies for calculating risk-weighted assets (“RWA”), a general (Standardized) approach, which replaces Basel I RWA (“Basel III Standardized”) and an advanced approach, which replaces 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 January 1, 2014 and continue through the end of 2018 (“Transitional period”) as described below. Both Basel III Standardized and Basel III Advanced became effective commencing January 1, 2014 for large and internationally active U.S. bank holding companies and banks, including the Firm and its insured depository institution (“IDI”) subsidiaries.
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.
Management’s discussion and analysis
148 JPMorgan Chase & Co./2014 Annual Report
Capital ratios
The basis to calculate the Firm’s capital ratios (both risk-based and leverage) under Basel III during the transitional period and when fully phased-in are shown in the table below.
Transitional period Fully Phased-In
2014 2015 – 2017 2018 2019+
Capital (Numerator) Basel III Transitional Capital(a) Basel III Capital
RWA (Denominator) Standardized
Approach Basel I with 2.5(b) Basel III Standardized
Advanced
Approach Basel III Advanced
Leverage (Denominator) Tier 1 Leverage Adjusted average assets(c)
Supplementary
leverage Adjusted average assets(c) + off-balance sheet exposures
(a) Trust preferred securities (“TruPS”) are being phased out from inclusion in Basel III capital commencing January 1, 2014, continuing through the end of 2021.
(b) Defined as Basel III Standardized Transitional for 2014. Beginning January 1, 2015, Basel III Standardized RWA is calculated under the Basel III definition of the Standardized Approach.
(c) Adjusted average assets, for purposes of calculating the leverage ratio and SLR, includes total quarterly average assets adjusted for unrealized gains/(losses) on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries, and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.
Risk-based capital regulatory minimums
The Basel III rules include minimum capital ratio requirements that are also subject to phase-in periods through January 1, 2019.
In addition to the regulatory minimum capital
requirements, certain banking organizations, including the Firm, will be required to hold an additional 2.5% of CET1 capital to serve as a “capital conservation buffer.” The capital conservation buffer is intended to be used to absorb potential losses in times of financial or economic stress; if not maintained, the Firm could be limited in the amount of capital that may be distributed, including dividends and common equity repurchases. The capital conservation buffer will be phased-in beginning January 1, 2016.
Moreover, G-SIBs will be required to maintain, in addition to the capital conservation buffer, further amounts of capital ranging from 1% to 2.5% across all tiers of regulatory capital. In November 2014, based upon data as of December 31, 2013, the Financial Stability Board (“FSB”) indicated that certain G-SIBs, including the Firm, would be required to hold the additional 2.5% of capital; the requirement will be phased-in beginning January 1, 2016.
The Basel Committee has stated that G-SIBs could in the future be required to hold 3.5% or more of additional capital if their relative systemic importance were to increase. Currently, no G-SIB is required to hold more than the additional 2.5% of capital.
Consequently, based upon the final rules currently in effect, the minimum Basel III CET1 capital ratio requirement for the Firm is expected to be 9.5%, comprised of the
minimum ratio of 4.5% plus the 2.5% capital conservation buffer and the 2.5% G-SIB requirement both beginning January 1, 2019.
Basel III also establishes a minimum 6.5% CET1 standard for the definition of “well capitalized” under the Prompt Corrective Action (“PCA”) requirements of the FDIC
Improvement Act (“FDICIA”). The CET1 standard is effective beginning with the first quarter of 2015.
JPMorgan Chase & Co./2014 Annual Report 149
The following chart presents the Basel III minimum CET1 capital ratio during the transitional periods and on a fully phased-in basis under the Basel III rules currently in effect. It is the Firm’s current expectation that its Basel III CET1 ratio will exceed the regulatory minimums, both during the transition period and upon full implementation in 2019 and thereafter.
On December 9, 2014, the Federal Reserve issued a Notice of Proposed Rulemaking (“NPR”) that would establish a new capital surcharge across all tiers of regulatory capital for G-SIBs in the U.S., including the Firm. The Firm estimates its fully phased-in G-SIB surcharge (based upon data as of December 31, 2013) would be 4.5% under the NPR, compared to a fully phased-in G-SIB surcharge of 2.5% as estimated under the Basel III rules currently in effect.
Basel III Advanced Fully Phased-In
Based on the U.S. capital rules currently in effect, 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, and the Firm will continue to have its capital adequacy evaluated against the approach that results in the lower ratio. While the Firm has recently imposed Basel III Standardized Fully Phased-In RWA limits on the lines of business in adapting its capital framework, the Firm currently expects 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 Advanced Fully Phased-In (and CET1 under Basel I as of December 31, 2013), are non-GAAP financial measures. However, such measures are used by bank regulators, investors and analysts to assess the Firm’s capital position and to compare the Firm’s capital to that of other financial services companies.
The Firm’s estimates of its Basel III Advanced Fully Phased-In capital, RWA and capital ratios and of the Firm’s, JPMorgan Chase Bank, N.A.’s, and Chase Bank USA, N.A.’s SLRs reflect management’s current understanding of the U.S. Basel III rules based on the current published rules and
on the application of such rules to the Firm’s businesses as currently conducted. The actual impact on the Firm’s capital ratios and SLR as of the effective date of the rules may differ from the Firm’s current estimates depending on changes the Firm may make to its businesses in the future, further implementation guidance from the regulators, and regulatory approval of certain of the Firm’s internal risk models (or, alternatively, regulatory disapproval of the Firm’s internal risk models that have previously been conditionally approved).
The following table presents the estimated Basel III
Advanced Fully Phased-In Capital ratios for JPMorgan Chase at December 31, 2014. Also included in the table are the regulatory minimum ratios currently expected to be in effect beginning January 1, 2019.
Basel III Advanced Fully
Phased-In
December 31, 2014
Fully phased-in minimum capital ratios(a)
Fully phased-in well-capitalized
ratios(b) Risk-based capital
ratios:
CET1 capital 10.2% 9.5% 6.5%
Tier 1 capital 11.4 11.0 8.0
Total capital 12.8 13.0 10.0
Leverage ratio:
Tier 1 7.5 4.0 5.0
SLR 5.6 3.0 5.0
(a) Represents the minimum capital ratios applicable to the Firm under fully phased-in Basel III rules currently in effect.
(b) Represents the minimum Basel III Fully Phased-In capital ratios applicable to the Firm under the PCA requirements of FDICIA.
Management’s discussion and analysis
150 JPMorgan Chase & Co./2014 Annual Report
A reconciliation of total stockholders’ equity to Basel III Advanced Fully Phased-In CET1 capital, Tier 1 capital and Total qualifying capital is presented in the table below.
Risk-based capital components and assets
Basel III Advanced Fully Phased-In
(in millions) December 31, 2014
Total stockholders’ equity $ 232,065
Less: Preferred stock 20,063
Common stockholders’ equity 212,002
Less:
Goodwill(a) 44,925
Other intangible assets(a) 1,062
Other CET1 capital adjustments 1,163
CET1 capital 164,852
Preferred stock 20,063
Less:
Other Tier 1 adjustments 5
Total Tier 1 capital 184,910
Long-term debt and other instruments
qualifying as Tier 2 capital 17,504
Qualifying allowance for credit losses 4,266
Other (86)
Total Tier 2 capital 21,684
Total capital $ 206,594
Credit risk RWA $ 1,040,087
Market risk RWA 179,200
Operational risk RWA 400,000
Total RWA $ 1,619,287
SLR leverage exposure $ 3,320,404
(a) Goodwill and other intangible assets are net of any associated deferred tax liabilities.
Capital rollforward
The following table presents the changes in CET1 capital, Tier 1 capital and Tier 2 capital for the year ended December 31, 2014. Under Basel I CET1 represents Tier 1 common capital.
Year ended December 31, (in millions) 2014
Basel I CET1 capital at December 31, 2013 $ 148,887
Effect of rule changes(a) 2,315
Basel III Advanced Fully Phased-In CET1 capital at
December 31, 2013 151,202
Net income applicable to common equity 20,637
Dividends declared on common stock (6,078)
Net purchases of treasury stock (3,009)
Changes in additional paid-in capital (558)
Changes related to AOCI 1,327
Adjustment related to FVA/DVA 580
Other 751
Increase in CET1 capital 13,650
Basel III Advanced Fully Phased-In CET1 capital at
December 31, 2014 $ 164,852
Basel I Tier 1 capital at December 31, 2013 $ 165,663
Effect of rule changes(b) (3,295)
Basel III Advanced Fully Phased-In Tier 1 capital at
December 31, 2013 162,368
Change in CET1 capital 13,650
Net issuance of noncumulative perpetual preferred stock 8,905
Other (13)
Increase in Tier 1 capital 22,542
Basel III Advanced Fully Phased-In Tier 1 capital at
December 31, 2014 $ 184,910
Basel I Tier 2 capital at December 31, 2013 $ 33,623
Effect of rule changes(c) (11,644)
Basel III Advanced Fully Phased-In Tier 2 capital at
December 31, 2013 21,979
Change in long-term debt and other instruments qualifying
as Tier 2 809
Change in allowance for credit losses (1,063)
Other (41)
Decrease in Tier 2 capital (295)
Basel III Advanced Fully Phased-In Tier 2 capital at
December 31, 2014 $ 21,684
Basel III Advanced Fully Phased-In Total capital at
December 31, 2014 $ 206,594
(a) Predominantly represents: (1) the addition of certain exposures, which were deducted from capital under Basel I, that are risk-weighted under Basel III; (2) adjustments related to AOCI for AFS securities and defined benefit pension and OPEB plans; and (3) a deduction for deferred tax assets related to NOL carryforwards.
(b) Predominantly represents the exclusion of TruPS from Tier 1 capital under Basel III.
(c) Predominantly represents a change in the calculation of qualifying allowance for credit losses under Basel III.
JPMorgan Chase & Co./2014 Annual Report 151
RWA rollforward
The following table presents changes in the components of RWA under Basel III Advanced Fully Phased-In for the year ended December 31, 2014. The amounts in the rollforward categories are estimates, based on the predominant driver of the change.
Year ended December 31, (in millions)
(in billions)
Credit risk RWA
Market risk RWA
Operational risk RWA
Total RWA Basel I RWA at December
31, 2013 $1,223 $ 165 NA $1,388
Effect of rule changes(a) (168) (4) 375 203
Basel III Advanced Fully Phased-In RWA at
December 31, 2013 1,055 161 375 1,591
Model & data changes(b) 56 36 25 117
Portfolio runoff(c) (22) (22) — (44)
Movement in portfolio
levels(d) (49) 4 — (45)
Changes in RWA (15) 18 25 28
Basel III Advanced Fully Phased-In RWA at
December 31, 2014 $1,040 $ 179 $ 400 $1,619 (a) Effect of rule changes refers to movements in levels of RWA as a result
of changing to calculating RWA under the Basel III Advanced Fully Phased-In rules. See Risk-weighted assets on page 147 for additional information on the calculation of RWA under Basel III.
(b) Model & data changes refer to movements in levels of RWA as a result of revised methodologies and/or treatment per regulatory guidance (exclusive of rule changes).
(c) Portfolio runoff for credit risk RWA reflects lower loan balances in Mortgage Banking and reduced risk from position rolloffs in legacy portfolios, and for market risk RWA reflects reduced risk from position rolloffs in legacy portfolios.
(d) Movement in portfolio levels for credit risk RWA refers to changes in book size, composition, credit quality, and market movements; and for market risk RWA, refers to changes in position and market movements.
Basel III Transitional
Basel III Transitional capital requirements became effective on January 1, 2014, and will become fully phased-in on January 1, 2019. The following table presents a
reconciliation of the Firm’s Basel III Advanced Transitional capital and RWA to the Firm’s estimated Basel III Advanced Fully Phased-In capital and RWA as of December 31, 2014.
December 31, 2014 (in millions)
Basel III Advanced Transitional CET1 capital $ 164,764
AOCI phase-in(a) 2,249
CET1 capital deduction phased-in(b) (1,212)
Intangibles deduction phase-in(c) (850)
Other adjustments to CET1 capital(d) (99)
Basel III Advanced Fully Phased-In CET1 capital $ 164,852 Basel III Advanced Transitional Additional Tier 1
capital $ 21,868
Non-qualifying instruments phase-out (2,670)
Tier 1 capital deduction phased-out(b) 1,212 Other adjustments to Tier 1 capital(d) (352) Basel III Advanced Fully Phased-In Additional Tier 1
capital $ 20,058
Basel III Advanced Fully Phased-In Tier 1 capital $ 184,910 Basel III Advanced Transitional Tier 2 capital $ 24,390
Non-qualifying instruments phase-out (2,670)
Other adjustments to Tier 2 capital(e) (36)
Basel III Advanced Fully Phased-In Tier 2 capital $ 21,684 Basel III Advanced Fully Phased-In Total capital $ 206,594 Basel III Advanced Transitional RWA $ 1,608,240 Adjustment related to change in risk-weighting(f) 11,047 Basel III Advanced Fully Phased-In RWA $ 1,619,287 (a) Includes the remaining balance of AOCI related to AFS debt securities and defined benefit pension and OPEB plans that will qualify as Basel III CET1 capital upon full phase-in.
(b) Predominantly includes regulatory adjustments related to changes in FVA/DVA, as well as CET1 deductions for defined benefit pension plan assets and DTA related to net operating loss carryforwards.
(c) Relates to intangible assets, other than goodwill and MSRs, that are required to be deducted from CET1 capital upon full phase-in.
(d) Includes minority interest and the Firm’s investments in its own CET1 capital instruments.
(e) Includes the Firm’s investments in its own Tier 2 capital instruments and unrealized gains on AFS equity securities.
(f) Primarily relates to the risk-weighting of items not subject to capital deduction thresholds including MSRs.
Management’s discussion and analysis
152 JPMorgan Chase & Co./2014 Annual Report
The following table presents the regulatory capital ratios as of December 31 2014, under Basel III Standardized Transitional and Basel III Advanced Transitional. Also included in the table are the regulatory minimum ratios in effect as of December 31, 2014.
December 31, 2014 Basel III
Standardized Transitional
Basel III Advanced Transitional
Minimum capital ratios(b)
Well-capitalized
ratios(c) Risk-based
capital ratios(a):
CET1 capital 11.2% 10.2% 4.0% NA (d)
Tier 1 capital 12.7 11.6 5.5 6.0%
Total capital 15.0 13.1 8.0 10.0
Leverage ratio:
Tier 1 leverage 7.6 7.6 4.0 5.0
(a) For each of the risk-based capital ratios the lower of the Standardized Transitional or Advanced Transitional ratio represents the Collins Floor.
(b) Represents the minimum capital ratios for 2014 currently applicable to the Firm under Basel III.
(c) Represents the minimum capital ratios for 2014 currently applicable to the Firm under the PCA requirements of the FDICIA.
(d) The CET1 capital ratio became a relevant measure of capital under the prompt corrective action requirements on January 1, 2015.
At December 31, 2014, JPMorgan Chase maintained Basel III Standardized Transitional and Basel III Advanced Transitional capital ratios in excess of the well-capitalized standards established by the Federal Reserve.
Additional information regarding the Firm’s capital ratios and the U.S. federal regulatory capital standards to which the Firm is subject is presented in Note 28. For further information on the Firm’s Basel III measures, see the Firm’s consolidated Pillar 3 Regulatory Capital Disclosures reports, which are available on the Firm’s website (http://
investor.shareholder.com/jpmorganchase/basel.cfm).
Supplementary leverage ratio
The Firm estimates that if the U.S. SLR final rule were in effect at December 31, 2014, the Firm’s SLR would have been approximately 5.6% and JPMorgan Chase Bank, N.A.’s and Chase Bank USA, N.A.’s SLRs would have been
approximately 5.9% and 8.1%, respectively, at that date.
Comprehensive Capital Analysis and Review (“CCAR”) The Federal Reserve requires large bank holding
companies, including the Firm, to submit a capital plan on an annual basis. The Federal Reserve uses the CCAR and Dodd-Frank Act stress test processes to ensure that large bank holding companies have sufficient capital during periods of economic and financial stress, and have robust, forward-looking capital assessment and planning processes in place that address each BHC’s unique risks to enable them to have the ability to absorb losses under certain stress scenarios. Through the CCAR, the Federal Reserve evaluates each BHC’s capital adequacy and internal capital adequacy assessment processes, as well as its plans to make capital distributions, such as dividend payments or stock repurchases.
On March 26, 2014, the Federal Reserve informed the Firm that it did not object, on either a quantitative or qualitative basis, to the Firm’s 2014 capital plan. For information on actions taken by the Firm’s Board of Directors following the 2014 CCAR results, see Capital actions on page 154.
On January 5, 2015, the Firm submitted its 2015 capital plan to the Federal Reserve under the Federal Reserve’s 2015 CCAR process. The Firm expects to receive the Federal Reserve’s final response to its plan no later than March 31, 2015.
The Firm’s CCAR process is integrated into and employs the same methodologies utilized in the Firm’s Internal Capital Adequacy Assessment Process (“ICAAP”) process, as discussed below.
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.
Minimum Total Loss Absorbing Capacity (“TLAC”)
In November 2014, the FSB, in consultation with the Basel Committee on Banking Supervision, issued a consultative document proposing that, in order for G-SIBs to have sufficient loss absorbing and recapitalization capacity to support an orderly resolution, they would be required to have outstanding a sufficient amount and type of debt and capital instruments. This amount and type of debt and capital instruments (or “total loss absorbing capacity” or TLAC) is intended to effectively absorb losses, as necessary, upon a failure of a G-SIB, without imposing such losses on taxpayers of the relevant jurisdiction or causing severe systemic disruptions, and thereby ensuring the continuity of the G-SIBs critical functions. The document identifies specific criteria that must be met for instruments to be considered eligible under TLAC and sets out minimum requirements that include existing Basel III minimum capital requirements, excluding capital buffers. The FSB’s proposed range for a common minimum TLAC requirement is
16-20% of the financial institution’s RWA and at least twice its Basel III Tier 1 leverage ratio. The Firm estimated that it has approximately 15% minimum TLAC as a percentage of