objectives of effective liquidity management are to ensure that the Firm’s core businesses are able to operate in support of client needs and meet contractual and
contingent obligations through normal economic cycles, as well as during market stress events, and to maintain debt ratings that enable the Firm to optimize its funding mix and liquidity sources while minimizing costs.
The Firm manages liquidity and funding using a centralized, global approach in order to optimize liquidity sources and uses for the Firm as a whole, monitor exposures, identify constraints on the transfer of liquidity among legal entities within the Firm, and maintain the appropriate amount of surplus liquidity as part of the Firm’s overall balance sheet management strategy.
In the context of the Firm’s liquidity management, Treasury is responsible for:
• Measuring, managing, monitoring and reporting the Firm’s current and projected liquidity sources and uses;
• Understanding the liquidity characteristics of the Firm’s assets and liabilities;
• Defining and monitoring firmwide and legal entity liquidity strategies, policies, guidelines, and contingency funding plans;
• Liquidity stress testing under a variety of adverse scenarios
• Managing funding mix and deployment of excess short-term cash;
• Defining and implementing funds transfer pricing (“FTP”) across all lines of business and regions; and
• Defining and addressing the impact of regulatory changes on funding and liquidity.
The Firm has a liquidity risk governance framework to review, approve and monitor the implementation of liquidity risk policies at the firmwide, regional and line of business levels.
Specific risk committees responsible for liquidity risk governance include ALCO as well as lines of business and regional asset and liability management committees, and the CTC Risk Committee. For further discussion of the risk committees, see Enterprise-wide Risk Management on pages 113–173 of this Annual Report. In addition, during 2013, the Firm established an independent liquidity risk oversight function reporting into the CIO, Treasury and Corporate (“CTC”) CRO, which provides independent assessments and monitoring of liquidity risk across the Firm.
Management considers the Firm’s liquidity position to be strong as of December 31, 2013, and believes that the Firm’s unsecured and secured funding capacity is sufficient to meet its on- and off-balance sheet obligations.
LCR and NSFR
In December 2010, the Basel Committee introduced two new measures of liquidity risk: the liquidity coverage ratio (“LCR”), which is intended to measure the amount of “high-quality liquid assets” (“HQLA”) held by the Firm in relation to estimated net cash outflows within a 30-day period during an acute stress event; and the net stable funding ratio (“NSFR”) which is intended to measure the “available”
amount of stable funding relative to the “required” amount of stable funding over a one-year horizon. The standards require that the LCR be no lower than 100% and the NSFR be greater than 100%.
In January 2013, the Basel Committee introduced certain amendments to the formulation of the LCR, and a revised timetable to phase in the standard. The LCR will continue to become effective on January 1, 2015, but the minimum requirement will begin at 60%, increasing in equal annual increments to reach 100% on January 1, 2019. At
December 31, 2013, the Firm was compliant with the Basel III LCR. The LCR may fluctuate from period-to-period due to normal flows from client activity.
On October 24, 2013, the U.S. banking regulators released a proposal to implement a U.S. quantitative liquidity requirement consistent with, but more conservative than, Basel III LCR for large banks and bank holding companies (“U.S. LCR”). The proposal also provides for an accelerated transition period compared to that which is currently required under the Basel III LCR rules. At December 31, 2013, the Firm was also compliant with the U.S. LCR based on its current understanding of the proposed rules.
On January 12, 2014, the Basel Committee released proposed revisions to the NSFR. Based on its current understanding of the proposed revisions, the Firm was compliant with the NSFR as of December 31, 2013.
Funding
Sources of funds
The Firm funds its global balance sheet through diverse sources of funding including a stable deposit franchise as well as secured and unsecured funding in the capital markets. The Firm’s loan portfolio, aggregating approximately $722.2 billion, net of allowance, at December 31, 2013, is funded with a portion of the Firm’s deposits (aggregating approximately $1,287.8 billion at December 31, 2013), and through securitizations and, with respect to a portion of the Firm’s real estate-related loans, with secured borrowings from the Federal Home Loan Banks. Deposits in excess of the amount utilized to fund loans are primarily invested in the Firm’s investment securities portfolio or deployed in cash or other short-term liquid investments based on their interest rate and liquidity
JPMorgan Chase & Co./2013 Annual Report 169
risk characteristics. Capital markets secured financing assets and trading assets are primarily funded by the Firm’s capital market secured financing liabilities, trading
liabilities and a portion of the Firm’s long-term debt and equity.
In addition to funding capital markets assets, proceeds from the Firm’s debt and equity issuances are used to fund certain loans, and other financial and non-financial assets, or may be invested in the Firm’s investment securities portfolio. See the discussion below for additional disclosures relating to Deposits, Short-term funding, and Long-term funding and issuance.
Deposits
A key strength of the Firm is its diversified deposit franchise, through each of its lines of business, which provides a stable source of funding and limits reliance on the wholesale funding markets. As of December 31, 2013, the Firm’s loans-to-deposits ratio was 57%, compared with 61% at December 31, 2012.
As of December 31, 2013, total deposits for the Firm were
$1,287.8 billion, compared with $1,193.6 billion at December 31, 2012 (58% and 55% of total liabilities at December 31, 2013 and 2012, respectively). The increase was due to growth in both wholesale and consumer deposits. For further information, see Balance Sheet Analysis on pages 75–76 of this Annual Report.
The Firm typically experiences higher customer deposit inflows at period-ends. Therefore, the Firm believes average deposit balances are more representative of deposit trends. The table below summarizes, by line of business, the period-end and average deposit balances as of and for the years ended December 31, 2013 and 2012.
Deposits Year ended December 31,
As of or for the period ended December 31, Average
(in millions) 2013 2012 2013 2012
Consumer & Community Banking $ 464,412 $ 438,517 $ 453,304 $ 413,948
Corporate & Investment Bank 446,237 385,560 384,289 353,048
Commercial Banking 206,127 198,383 184,409 181,805
Asset Management 146,183 144,579 139,707 129,208
Corporate/Private Equity 24,806 26,554 27,433 27,874
Total Firm $ 1,287,765 $ 1,193,593 $ 1,189,142 $ 1,105,883
A significant portion of the Firm’s deposits are consumer deposits (36% and 37% at December 31, 2013 and 2012, respectively), which are considered particularly stable as they are less sensitive to interest rate changes or market volatility.
Additionally, the majority of the Firm’s institutional deposits are also considered to be stable sources of funding since they are generated from customers that maintain operating service relationships with the Firm. For further discussions of deposit and liability balance trends, see the discussion of the results for the Firm’s business segments and the Balance Sheet Analysis on pages 86–111 and 75–76, respectively, of this Annual Report.
Management’s discussion and analysis
170 JPMorgan Chase & Co./2013 Annual Report
The following table summarizes short-term and long-term funding, excluding deposits, as of December 31, 2013 and 2012, and average balances for the years ended December 31, 2013 and 2012. For additional information, see the Balance Sheet Analysis on pages 75–76 and Note 21 on pages 306–308 of this Annual Report.
Sources of funds (excluding deposits)
2013 2012
As of or for the year ended December 31, Average
(in millions) 2013 2012
Commercial paper:
Wholesale funding $ 17,249 $ 15,589 $ 17,785 $ 14,302
Client cash management 40,599 39,778 35,932 36,478
Total commercial paper $ 57,848 $ 55,367 $ 53,717 $ 50,780
Other borrowed funds $ 27,994 $ 26,636 $ 30,449 $ 24,174
Securities loaned or sold under agreements to repurchase:
Securities sold under agreements to repurchase $ 155,808 $ 212,278 $ 207,106 $ 219,625
Securities loaned 19,509 23,125 26,068 20,763
Total securities loaned or sold under agreements to repurchase(a)(b)(c) $ 175,317 $ 235,403 $ 233,174 $ 240,388
Total senior notes $ 135,754 $ 130,297 $ 137,662 $ 141,936
Trust preferred securities 5,445 10,399 7,178 15,814
Subordinated debt 29,578 29,731 27,955 29,410
Structured notes 28,603 30,194 29,517 31,330
Total long-term unsecured funding $ 199,380 $ 200,621 $ 202,312 $ 218,490
Credit card securitization $ 26,580 $ 30,123 $ 27,834 $ 29,249
Other securitizations(d) 3,253 3,680 3,501 3,974
FHLB advances 61,876 42,045 55,487 20,415
Other long-term secured funding(e) 6,633 6,358 6,284 6,757
Total long-term secured funding $ 98,342 $ 82,206 $ 93,106 $ 60,395
Preferred stock(f) $ 11,158 $ 9,058 $ 10,960 $ 8,236
Common stockholders’ equity(f) $ 200,020 $ 195,011 $ 196,409 $ 184,352
(a) Excludes federal funds purchased.
(b) Excluded long-term structured repurchase agreements of $4.6 billion and $3.3 billion as of December 31, 2013 and 2012, respectively, and average balance of $4.2 billion and $7.0 billion for the years ended December 31, 2013 and 2012, respectively.
(c) Excluded long-term securities loaned of $483 million and $457 million as of December 31, 2013 and 2012, respectively, and average balance of $414 million and $113 million for the years ended December 31, 2013 and 2012, respectively.
(d) Other securitizations includes securitizations of residential mortgages and student loans. The Firm’s wholesale businesses also securitize loans for client-driven transactions; those client-client-driven loan securitizations are not considered to be a source of funding for the Firm and are not included in the table.
(e) Includes long-term structured notes which are secured.
(f) For additional information on preferred stock and common stockholders’ equity see Capital Management on pages 160–167, Consolidated Statements of Changes in Stockholders’ Equity on page 187, Note 22 on page 309 and Note 23 on page 310 of this Annual Report.
Short-term funding
A significant portion of the Firm’s total commercial paper liabilities, approximately 70% as of December 31, 2013, are not sourced from wholesale funding markets, but were originated from deposits that customers choose to sweep into commercial paper liabilities as a cash management program offered to customers of the Firm.
The Firm’s sources of short-term secured funding primarily consist of securities loaned or sold under agreements to repurchase. Securities loaned or sold under agreements to repurchase are secured predominantly by high-quality securities collateral, including government-issued debt, agency debt and agency MBS, and constitute a significant
portion of the federal funds purchased and securities loaned or sold under purchase agreements. The amounts of securities loaned or sold under agreements to repurchase at December 31, 2013, decreased predominantly due to a change in the mix of the Firm’s funding sources. The balances associated with securities loaned or sold under agreements to repurchase fluctuate over time due to customers’ investment and financing activities; the Firm’s demand for financing; the ongoing management of the mix of the Firm’s liabilities, including its secured and unsecured financing (for both the investment and market-making portfolios); and other market and portfolio factors.
JPMorgan Chase & Co./2013 Annual Report 171
Long-term funding and issuance
Long-term funding provides additional sources of stable funding and liquidity for the Firm. The Firm’s long-term funding plan is driven by expected client activity and the liquidity required to support this activity. Long-term funding objectives include maintaining diversification, maximizing market access and optimizing funding cost, as well as maintaining a certain level of pre-funding at the parent holding company. The Firm evaluates various funding markets, tenors and currencies in creating its optimal long-term funding plan.
The majority of the Firm’s long-term unsecured funding is issued by the parent holding company to provide maximum flexibility in support of both bank and nonbank subsidiary funding. The following table summarizes long-term unsecured issuance and maturities or redemption for the years ended December 31, 2013 and 2012. For additional information, see Note 21 on pages 306–308 of this Annual Report.
Long-term unsecured funding Year ended December 31,
(in millions) 2013 2012
Issuance
Senior notes issued in the U.S. market $ 19,835 $ 15,566 Senior notes issued in non-U.S. markets 8,843 8,341
Total senior notes 28,678 23,907
Trust preferred securities — —
Subordinated debt 3,232 —
Structured notes 16,979 15,120
Total long-term unsecured funding –
issuance $ 48,889 $ 39,027
Maturities/redemptions
Total senior notes $ 18,418 $ 40,244
Trust preferred securities(a) 5,052 9,482
Subordinated debt 2,418 1,045
Structured notes 17,785 18,638
Total long-term unsecured funding –
maturities/redemptions $ 43,673 $ 69,409 (a) On May 8, 2013, the Firm redeemed approximately $5.0 billion, or
100% of the liquidation amount, of trust preferred securities pursuant to the optional redemption provisions set forth in the documents governing those trust preferred securities.
In addition, from January 1, 2014, through February 19, 2014, the Firm issued $12.7 billion of senior notes.
The Firm raises secured long-term funding through securitization of consumer credit card loans and advances from the FHLBs. It may also in the future raise long-term funding through securitization of residential mortgages, auto loans and student loans, which will increase funding and investor diversity.
The following table summarizes the securitization issuance and FHLB advances and their respective maturities or redemption for the years ended December 31, 2013 and 2012.
Long-term secured funding Year ended
December 31, Issuance Maturities/Redemptions
(in millions) 2013 2012 2013 2012
Credit card
securitization $ 8,434 $ 10,800 $ 11,853 $ 13,187
Other securitizations(a) — — 427 487
FHLB advances 23,650 35,350 3,815 11,124
Other long-term
secured funding $ 751 $ 534 $ 159 $ 1,785
Total long-term
secured funding $ 32,835 $ 46,684 $ 16,254 $ 26,583 (a) Other securitizations includes securitizations of residential mortgages
and student loans.
On January 27, 2014, the Firm securitized $1.8 billion of consumer credit card loans.
The Firm’s wholesale businesses also securitize loans for client-driven transactions; those client-driven loan
securitizations are not considered to be a source of funding for the Firm and are not included in the table above. For further description of the client-driven loan securitizations, see Note 16 on pages 288–299 of this Annual Report.
Parent holding company and subsidiary funding
The parent holding company acts as an important source of funding to its subsidiaries. The Firm’s liquidity management is intended to ensure that liquidity at the parent holding company is maintained at levels sufficient to fund the operations of the parent holding company and its subsidiaries for an extended period of time in a stress environment where access to normal funding sources is disrupted.
To effectively monitor the adequacy of liquidity and funding at the parent holding company, the Firm uses three primary measures:
• Number of months of funding: The Firm targets pre-funding of the parent holding company to ensure that both contractual and non-contractual obligations can be met for at least 18 months assuming no access to wholesale funding markets. However, due to conservative liquidity management actions taken by the Firm, the current pre-funding of such obligations is greater than target.
• Excess cash: Excess cash is managed to ensure that daily cash requirements can be met in both normal and stressed environments. Excess cash generated by parent holding company issuance activity is placed on deposit with or is advanced to both bank and nonbank
subsidiaries or held as liquid collateral purchased through reverse repurchase agreements.
• Stress testing: The Firm conducts regular stress testing for the parent holding company and major subsidiaries to
Management’s discussion and analysis
172 JPMorgan Chase & Co./2013 Annual Report
ensure sufficient liquidity for the Firm in a stressed environment. The Firm’s liquidity management takes into consideration its subsidiaries’ ability to generate
replacement funding in the event the parent holding company requires repayment of the aforementioned deposits and advances. For further information, see the Stress testing discussion below.
HQLA
HQLA is the estimated amount of assets the Firm believes will qualify for inclusion in the Basel III LCR. HQLA primarily consists of cash and certain unencumbered high quality, liquid assets as defined in the rule.
As of December 31, 2013, HQLA was estimated to be approximately $522 billion, compared with $341 billion as of December 31, 2012. The increase in HQLA was due to higher cash balances primarily driven by increased deposits and long-term debt issuance, as well as by a reduction in trading assets. HQLA may fluctuate from period-to-period due to normal flows from client activity.
The following table presents the estimated Basel III LCR HQLA broken out by HQLA-eligible cash and HQLA-eligible securities as of December 31, 2013.
(in billions) December 31, 2013
HQLA(a)
Eligible cash $ 294
Eligible securities 228
Total HQLA $ 522
(a) Table represents Basel III LCR HQLA. HQLA under proposed U.S. LCR is estimated to be lower primarily due to exclusions of certain security types based on the Firm’s understanding of the proposed rule.
In addition to HQLA, as of December 31, 2013, the Firm has approximately $282 billion of unencumbered marketable securities, such as equity securities and fixed income debt securities, available to raise liquidity, if required.
Furthermore, the Firm maintains borrowing capacity at various FHLBs, the Federal Reserve Bank discount window and various other central banks as a result of collateral pledged by the Firm to such banks. Although available, the Firm does not view the borrowing capacity at the Federal Reserve Bank discount window and the various other central banks as a primary source of liquidity. As of December 31, 2013, the Firm’s remaining borrowing capacity at various FHLBs and the Federal Reserve Bank discount window was approximately $109 billion. This borrowing capacity excludes the benefit of securities included above in HQLA or other unencumbered securities held at the Federal Reserve Bank discount window for which the Firm has not drawn liquidity.
Stress testing
Liquidity stress tests are intended to ensure sufficient liquidity for the Firm under a variety of adverse scenarios.
Results of stress tests are therefore considered in the formulation of the Firm’s funding plan and assessment of its liquidity position. Liquidity outflow assumptions are modeled across a range of time horizons and varying degrees of market and idiosyncratic stress. Standard stress tests are performed on a regular basis and ad hoc stress tests are performed in response to specific market events or concerns. Stress scenarios are produced for the parent holding company and the Firm’s major subsidiaries. In addition, separate regional liquidity stress testing is performed.
Liquidity stress tests assume all of the Firm’s contractual obligations are met and then take into consideration varying levels of access to unsecured and secured funding markets. Additionally, assumptions with respect to potential non-contractual and contingent outflows include, but are not limited to, the following:
• Deposits
For bank deposits that have no contractual maturity, the range of potential outflows reflects the type and size of deposit account, and the nature and extent of the Firm’s relationship with the depositor.
• Secured funding
Range of haircuts on collateral based on security type and counterparty.
• Derivatives
Margin calls by exchanges or clearing houses;
Collateral calls associated with ratings downgrade triggers and variation margin;
Outflows of excess client collateral;
Novation of derivative trades.
• Unfunded commitments
Potential facility drawdowns reflecting the type of commitment and counterparty.
Contingency funding plan
The Firm’s contingency funding plan (“CFP”), which is reviewed and approved by ALCO, provides a documented framework for managing both temporary and longer-term unexpected adverse liquidity stress. The CFP incorporates the limits and indicators set by the Liquidity Risk Oversight group. These limits and indicators are reviewed regularly to identify emerging risks or increased vulnerabilities in the Firm’s liquidity position. The CFP is also regularly updated to identify alternative contingent liquidity resources that can be accessed under adverse liquidity circumstances.
JPMorgan Chase & Co./2013 Annual Report 173
Credit ratings
The cost and availability of financing are influenced by credit ratings. Reductions in these ratings could have an adverse effect on the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral or funding requirements and decrease the number of investors and counterparties willing to lend to the Firm. Additionally, the Firm’s funding requirements for VIEs and other third
party commitments may be adversely affected by a decline in credit ratings. For additional information on the impact of a credit ratings downgrade on the funding requirements for VIEs, and on derivatives and collateral agreements, see Special-purpose entities on page 77, and Credit risk, liquidity risk and credit-related contingent features in Note 6 on pages 220–233, of this Annual Report.
The credit ratings of the parent holding company and certain of the Firm’s significant operating subsidiaries as of December 31, 2013, were as follows.
JPMorgan Chase & Co. JPMorgan Chase Bank, N.A.
Chase Bank USA, N.A. J.P. Morgan Securities LLC December 31, 2013
Long-term issuer
Short-term
issuer Outlook
Long-term issuer
Short-term
issuer Outlook
Long-term issuer
Short-term
issuer Outlook
Moody’s Investor Services A3 P-2 Stable Aa3 P-1 Stable Aa3 P-1 Stable
Standard & Poor’s A A-1 Negative A+ A-1 Stable A+ A-1 Stable
Fitch Ratings A+ F1 Stable A+ F1 Stable A+ F1 Stable
On June 11, 2013, S&P announced a reassessment of the government support assumptions reflected in its holding company ratings of eight systemically important financial institutions, including the Firm. As a result of this reassessment, the outlook for the parent company was revised to negative from stable; the outlook for the Firm’s operating subsidiaries remained unchanged at stable.
On November 14, 2013, Moody’s downgraded the Firm and several other bank holding companies based on Moody’s reassessment of its assumptions relating to implicit government support for such companies. Specifically, Moody’s downgraded the senior and subordinated debt ratings of JPMorgan Chase and Co., and the subordinated debt rating of JPMorgan Chase Bank, N.A. and upgraded the long-term issuer rating of JPMorgan Securities. The parent company downgrade also resulted in Moody’s downgrade of the parent company’s short-term rating. The rating actions did not have a material adverse impact on the Firm’s cost of funds or its ability to fund itself.
Additional downgrades of the Firm’s long-term ratings by one notch or two notches could result in a further downgrade of the Firm’s short-term ratings. If this were to occur, the Firm believes its cost of funds could increase and access to certain funding markets could be reduced. The nature and magnitude of the impact of further ratings downgrades depends on numerous contractual and
behavioral factors (which the Firm believes are
incorporated in its liquidity risk and stress testing metrics).
The Firm believes it maintains sufficient liquidity to withstand a potential decrease in funding capacity due to further ratings downgrades.
JPMorgan Chase’s unsecured debt does not contain requirements that would call for an acceleration of payments, maturities or changes in the structure of the existing debt, provide any limitations on future borrowings or require additional collateral, based on unfavorable changes in the Firm’s credit ratings, financial ratios, earnings, or stock price.
Critical factors in maintaining high credit ratings include a stable and diverse earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources, and disciplined liquidity monitoring procedures. Rating agencies continue to evaluate economic and geopolitical trends, regulatory developments, rating uplift assumptions surrounding government support, future profitability, risk management practices, and legal
expenses, all of which could lead to adverse ratings actions.
Although the Firm closely monitors and endeavors to manage factors influencing its credit ratings, there is no assurance that its credit ratings will not be further changed in the future.