Financial Highlights
As of or for the year ended December 31,
(in millions, except per share, ratio data and headcount) 2014 2013
Reported basis(a)
Total net revenue $ 94,205 $ 96,606
Total noninterest expense 61,274 70,467
Pre-provision proit 32,931 26,139
Provision for credit losses 3,139 225
Net income $ 21,762 $ 17,923
Per common share data
Net income per share:
Basic $ 5.34 $ 4.39
Diluted 5.29 4.35
Cash dividends declared 1.58 1.44
Book value 57.07 53.25
Tangible book value(b) 44.69 40.81
Selected ratios
Return on common equity 10% 9%
Return on tangible common equity(b) 13 11
Common equity Tier 1 (“CET1”) capital ratio(c) 10.2 10.7
Tier 1 capital ratio(c) 11.6 11.9
Total capital ratio(c) 13.1 14.4
Selected balance sheet data (period-end)
Loans $ 757,336 $ 738,418
Total assets 2,573,126 2,415,689
Deposits 1,363,427 1,287,765
Total stockholders’ equity 232,065 211,178
Headcount 241,359 251,196
(a) Results are presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), except where otherwise noted.
(b) Non-GAAP inancial measure. For further discussion, see “Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures” in this Annual Report.
(c) Basel III Transitional rules became efective on January 1, 2014; prior period data is based on Basel I rules. As of December 31, 2014, the ratios presented are calculated under the Basel III Advanced Transitional Approach. CET1 capital under Basel III replaced Tier 1 common capital under Basel I. Prior to Basel III becoming efective, Tier 1 common capital under Basel I was a non-GAAP inancial measure. For further discussion, see “Regulatory capital” in this Annual Report.
Financial Highlights
communities
clients
customers
employees
veterans
nonproits
business owners
schools
hospitals
22
Dear Fellow Shareholders,
Seven years ago, the world was shaken by the global inancial crisis. And since then, our company has been dealing with extraordinary challenges as a result of that crisis. We have endured an unprecedented economic, political and social storm — the impact of which will continue to be felt for years and possibly decades to come. What is most striking to me, in spite of all the turmoil, is that our company became safer and stronger — and it never stopped supporting clients, communities and the growth of economies around the world.
I feel extraordinarily privileged to work for this great company with such talented people. Our management team and our employees do outstanding work every single day — sometimes under enormous pressure — while dealing with an extreme number of complex business and regulatory issues. The way our people and our irm are able to address our challenges and admit our mistakes while continuing to grow our businesses and support our clients ills me with pride.
33
2014 2013
2012 2011
2010 2009
2008 2007
2006 2005
2004
$4.5 $1.52
$8.5
$2.35
$14.4
$4.00
$15.4
$4.33
$5.6
$1.35
$11.7
$2.26
$17.4
$3.96
$19.0
$4.48 $21.3
$5.20 $17.9
$4.35 $21.8
$5.29
Net income Diluted EPS
Our company earned a record $21.8 billion in net income on revenue1 of $97.9 billion in
2014. In fact, we have delivered record results in the last four out of ive years, and we hope to continue to deliver in the future. Our inancial results relected strong underlying performance across our businesses. Over the course of last year, our four franchises maintained — and even strengthened — our leadership positions and continued to gain market share, improve customer satisfaction and foster innovation. We also continued to deliver on our many commitments — including business simpliication, regulatory requirements, controls, expense discipline and capital requirements.
Earnings and Diluted Earnings per Share 2004–2014
($ in billions, except diluted EPS)
2014 2013
2012 2011
2010 2009
2008 2007
2006 2005
2004
$15.35 $16.45
$18.88
$21.96 $22.52
$27.09
$30.18
$33.69
$38.75 $40.81
$44.69 Tangible Book Value per Share
2004–2014
4 4
We believe that, in 2014, we continued to deliver for our shareholders. The table above shows the growth in tangible book value per share, which we believe is a conservative measure of value. You can see that the tangible book value per share has grown far more than the Standard & Poor’s 500 Index (S&P 500) in both time periods. For Bank One shareholders since March 27, 2000, the stock has performed far better than most inancial companies and the S&P 500. And since the JPMorgan Chase & Co. merger with Bank One on July 1, 2004, we have performed well versus other inancial companies and slightly below the S&P 500. The details are shown in the table below.
Bank One/JPMorgan Chase & Co. tangible book value per share performance vs. S&P 500
Bank One (A)
S&P 500 (B)
Relative Results (A) — (B)
Performance since becoming CEO of Bank One (3/27/2000–12/31/2014)(a):
Compounded annual gain 12.7% 5.3% 7.4%
Overall gain 434.9% 105.1% 329.8%
JPMorgan Chase & Co. (A)
S&P 500 (B)
Relative Results (A) — (B)
Performance since the Bank One and JPMorgan Chase & Co. merger (7/1/2004–12/31/2014):
Compounded annual gain 14.1% 8.0% 6.1%
Overall gain 300.5% 124.5% 176.0%
Tangible book value over time captures the company’s use of capital, balance sheet and profitability. In this chart, we are looking at heritage Bank One shareholders and JPMorgan Chase & Co. shareholders. The chart shows the increase in tangible book value per share; it is an aftertax number assuming all dividends were retained vs. the S&P 500 (a pretax number with dividends reinvested).
(a)On March 27, 2000, Jamie Dimon was hired as CEO of Bank One
Stock total return analysis
Bank One S&P 500 S&P Financials Index
Performance since becoming CEO of Bank One (3/27/2000–12/31/2014)(a):
Compounded annual gain 10.4% 4.0% 2.2%
Overall gain 328.3% 78.8% 37.4%
JPMorgan Chase & Co. S&P 500 S&P Financials Index
Performance since the Bank One and JPMorgan Chase & Co. merger (7/1/2004–12/31/2014):
Compounded annual gain 7.5% 8.0% 0.9%
Overall gain 113.3% 124.5% 9.5%
This chart shows actual returns of the stock, with dividends included, for heritage shareholders of Bank One and JPMorgan Chase & Co. vs. the Standard & Poor’s 500 Index (S&P 500) and the Standard & Poor’s Financials Index (S&P Financials Index).
55 However, our stock performance has not been particularly good in the last ive years. While the business franchise has become stronger, I believe that legal and regulatory
costs and future uncertainty regarding legal and regulatory costs have hurt our
company and the value of our stock and have led to a price/earnings ratio lower than some of our competitors. We are determined to limit (we can never completely eliminate them) our legal costs over time, and as we do, we expect that the strength and quality of the underlying business will shine through.
JPMorgan Chase continued to support consumers and businesses and make a
signiicant positive impact on our communities. In 2014, the irm provided credit
and raised capital of more than $2.1 trillion for our clients. The irm also has hired nearly 8,700 military veterans since 2011 as a proud founding member of the 100,000 Jobs Mission, which recently has increased the goal to 300,000 jobs. Our irm was
there to help small businesses — we provided $19 billion of credit to U.S. small
businesses, which allowed them to develop new products, expand operations and
hire more workers. In total, we provided $197 billion of credit to consumers. And
we provided credit and raised capital of more than $75 billion for nonproit and
government entities, including states, municipalities, hospitals and universities. Our strength allows us to be there for our clients and communities in good times — and, more important, in bad times. In the face of many diicult challenges, we never stopped doing our job, and we demonstrated that the work we do matters. And we also continue to build our business by investing in infrastructure, systems, technology and new products and by adding bankers and branches around the world.
New and Renewed Credit and Capital for Clients at December 31,
Corporate clients (9)% 20% 7%
Small business 18% (8)% 5%
Card & Auto (10)% 12% 18%
Commercial/ 11% 8% 41%
Middle market
Asset 41% 17% (23)%
management
Mortgage/ 22% (7)% (53)% Home equity
Total Consumer and 17% 5% (10)% Commercial Banking
‘11 to ‘12 ‘12 to ‘13 Year-over-year change
‘13 to ‘14
2014 2013 2012
2011 2011 2012 2013 2014
$156 $100 $110 $91
$191 $141 $122 $82 $474
$556
$20
$177 $165 $131 $92
$583
$18
$17
$84 $127 $185 $108
$523
$19
$1.4 $1.3
$1.5 $1.6
Corporate clients ($ in trillions)
6 6
In this letter, I will discuss the issues highlighted below. I also encourage you to read the letters written by several of our business leaders about our main businesses, our critical operations and controls, and some of our corporate responsibility eforts.
As usual, this letter will describe some of our successes and opportunities, as well as our challenges and issues. The main sections of the letter are as follows:
I. We have an outstanding franchise — our company has emerged as an endgame
winner, but we need to earn it every day
II. We build for the long term — we manage through-the-cycle, and we always are prepared for the toughest of times
III. We will successfully navigate the new global inancial architecture (and we are well on our way to having fortress controls)
IV. We have a solid strategy and believe our future outlook is very good — but, as usual, there still are a lot of things to think and worry about
V. We have a fully engaged board, an exceptional management team and a strong
corporate culture
Our clients also exhibit their faith in us by entrusting us to take care of their money — either as deposits or as client assets entrusted to us — as shown in the chart below.
Assets Entrusted to Us by Our Clients at December 31,
Deposits
Consumer 10% 6% 8%
Wholesale 3% 9% 4%
Client assets(a) 10% 13% 3% ‘11 to ‘12 ‘12 to ‘13
Year-over-year change ‘13 to ‘14 Deposits and client assets
($ in billions)
2014 2013
2012 2011
$2,035 $730 $398
$2,244 $755 $439
$2,534 $824 $464
$2,609 $861 $503 $3,438
$3,822 $3,973
Assets under custody(b)
($ in billions)
$16,870 $18,835 $20,485 $20,549
$3,163
(a) Represent assets under management as well as custody, brokerage, administration and deposit accounts
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If you think back 10, 20 or 30 years ago, my predecessors and I struggled to try to build a great company, which we hoped would emerge as an endgame winner. The ultimate outcome was unclear – and many competitors did not survive (this is true for most large-scale consolidating industries). Even for those of us that did, it was quite a struggle. Today, it is clear that our company is an endgame winner – both in the United States and glob-ally – which is invaluable in any industry. And while we have had some diicult times since the inancial crisis, the power of the franchise has shone through. We also know that future success is not guaranteed – only consistently good management over a long period of time can ensure long-term success in any business. But we certainly are in a very good place.
We vee ere year inancial results (strong margins and returns and low volatility) and have shown a great ability to adapt to changes — both from the marketplace and the regulatory environment
We always compare our margins and returns with those of our best competitors in each business. The chart below, which is very similar to a chart we showed at our Investor Day, shows some of these numbers for 2014. We believe that the right discipline is to compare each of our businesses against its
best competitor. It is a mistake just to look at the consolidated numbers and compare them – every company has a diferent mix of businesses. The chart below also shows how our businesses compare in terms of margins,
I.
W E H AV E A N O U TSTA N D I N G F R A N C H I S E — O U R
CO M PA N Y H A S E M E R G E D A S A N E N D G A M E W I N N E R ,
B U T W E N E E D TO E A R N I T EV E RY DAY
JPMorgan Chase Is in Line with Best-in-Class Peers in Both Eiciency and Returns
Eiciency Returns
JPM 2014 overhead ratios
Best-in-class peer overhead ratios2 weighted
by JPM revenue mix
JPM target overhead ratios
JPM 2014 ROE
Best-in-class peer ROTCE4
weighted by JPM equity mix
JPM target ROE
Consumer & Community Banking
58% 55%
WFC
~50% 18% 16%
WFC
20%
Corporate & Investment Bank
62%1 60%
Citi
55%-60% 13%1 14%
Citi
13%
Commercial Banking
39% 38%
PNC
35% 18% 13%
PNC
18%
Asset Management
71% 69%
UBS WM & BLK
≤70% 23% 27%
BEN
25%+
JPMorgan Chase 60%1 59%1 55%+/- 13%3 13% ~15%3
1 Excludes legal expense
2 Best-in-class overhead ratio represents implied expenses of comparable peer segments weighted by JPMorgan Chase (JPM) revenue: Wells Fargo Community Banking (WFC), Citi Institutional Clients Group (Citi), PNC Corporate and Institutional Banking (PNC), UBS Wealth Management and Wealth Management Americas (UBS WM) and BlackRock (BLK), and JPM Corporate segment
3 Represents ROTCE for total JPMorgan Chase. Goodwill is primarily related to the Bank One merger and prior acquisitions and is predominantly retained by Corporate
8 8
I . A N O U TSTA N D I N G F R A N C H I S E
our target margins in a normal environment and, most important, our return on equity (ROE). On most of these measures, we are very close to the best-in-class competitor.
A good company should be able to earn competitive margins over an extended period of time regardless of economic conditions while investing and without taking excessive risk Any company can improve earnings in the short run by taking on additional risk or cutting back on investments. Any company can grow rapidly if it takes on too much risk – but that usually is the kind of growth one comes to regret. Our margins have been quite good, even as we have been investing for the long run. These investment expenses lower our short-term returns, but they are “good” expenses. In addition to the tremendous amount that we invest annu-ally in technology and infrastructure, some examples of where we have invested over the past ive years are:
– 448 retail branches in the United States – 28 wholesale oices abroad
– 2,498 Chase Private Client locations/ branches, supported by 594 new Private Client advisors
– 20 Commercial Banking expansion cities, including approximately 350 Commercial Banking bankers
– 205 small business bankers
A good company always should be investing while it also is waste cutting; i.e., cutting out any unnecessary expenses. However, I often have received bad advice on what are unnecessary expenses. For example, spending on important strategic of-sites, research and development for innovation, marketing that has a positive return – those are good expenses. We take a bus trip annu-ally to visit branches, operating centers and clients. It is both fun and enormously productive – and it is not an unnecessary expense – it makes us a better company.
Even our annual Retail National Sales Conference with the top 5% of our branch bankers, loan oicers and tellers is critical – we spend time working together, we learn a lot and we get to thank these outstanding employees at an awards recognition dinner. While it is perfectly reasonable in tough times to dramatically reduce the cost of that conference, it is unwise to cancel it. I have been to every single one of these events since I started running Bank One, and I intend to continue that tradition.
We earned adequate returns while building an increasingly stronger capital base
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I . A N O U TSTA N D I N G F R A N C H I S E
The chart below shows earnings, the capital we returned to shareholders through divi-dends and stock buybacks, our returns on tangible common equity and our high quality liquid assets (HQLA). High quality liquid assets essentially are deposits held at the Federal Reserve and central banks, agency mortgage-backed securities and Treasuries, and they are the component of our balance sheet that has grown most dramatically. Only HQLA count for liquid assets under banking regulators’ deinition of liquidity – and we currently have more than is required by the regulators.
The chart below also shows that even after dramatically increasing capital and liquidity, both of which reduce returns on capital, we were able to earn an adequate return on tangible common equity, grow our capital base as needed and still return capital to shareholders.
Capital, Liquidity, Returns ($ in billions, except ratios)
2017+ 2016
2015 2014
2013 2012
2011 2010
7.0%
7.9%
8.7%
9.5%
10.2%
11.0% 11.5%
12.0%+
!
2
" # $ % 11
& ' () ) ) #" * 600
RO *+ *+ *+ + 13%
Glidepath3
Basel III common equity Tier 1 capital ratio (CET1)1
1 Basel III rules became efective on January 1, 2014. The ratios presented for 2010-2014 are calculated under the Basel III Advanced Fully Phased-In Approach and, for 2010-2013, relect the irm’s best estimate based on its understanding of the rules in the relevant period 2 Represents common dividends plus stock buybacks, which are gross of employee issuance
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I . A N O U TSTA N D I N G F R A N C H I S E
Our businesses have been able to gain market share, which only happens when we are creating happy clients
Importantly, much of the growth has been organic. Please review some of the numbers in the chart above – they speak for themselves. If you had asked me back in 2006 if we could have accomplished those kinds of market share numbers, I would have been skeptical. And, fortunately, we have plenty of areas where we still can grow or do better – I will talk about this in a later section of this letter.
Most of our businesses have exhibited improving customer satisfaction
The chart on the next page shows the great progress that our Consumer Bank has made in improving satisfaction scores. In fact,
American Customer Satisfaction Index named Chase #1 in customer satisfaction among large banks in 2014. We have received even better scores than most of the regional banks and essentially are equal in ranking to the midsized banks. (We still are not satis-ied, however, and want to be even better.) We believe that our customer satisfaction has been going up for multiple reasons: error rate reduction, better products and services, good old-fashioned service with a smile, and, importantly, innovations like deposit-friendly ATMs and continual improvement in online and mobile banking services. While the chart shows satisfaction in the Consumer Bank, we also have had increasing customer satisfac-tion scores in our small business, mortgage, auto inance and credit card franchises.
Leading Client Franchises
Building exceptional client franchises
We have built our client franchises over time with substantial share gains and opportunity for more
2006 2014
Consumer & Community Banking
Deposits market share
# of top 50 Chase markets where we are #1 (top 3) deposits
Card sales market share Merchant processing volume
3.6%1 11 (25) 16%2 #33 7.5% 15 (40) 21%2 #14
Relationships with ~50% of U.S. households #1 customer satisfaction among largest U.S. banks
for the third consecutive year14
#1 primary banking relationship share in Chase footprint15
#1 U.S. credit card issuer based on loans outstanding2
~50% of U.S. e-Commerce volume16
Corporate & Investment Bank
Global Investment Banking fees5
Market share5
Total Markets6,7
Market share6,7
FICC6,7
Market share6,7
Equities6,7
Market share6,7
#2 8.6% #8 7.9% #7 9.1% #8 6.0% #1 8.1% #1 16.2% #1 18.6% #3 11.5%
>80% of Fortune 500 companies do business with us
Top 3 in 15 product categories out of 1617
#1 in both U.S. and EMEA Investment Banking fees18
#1 in Global debt, equity and equity-related18
#1 in Global long-term debt and Loan syndications18
Top 3 Custodian globally with AUC of $20.5 trillion
#1 USD clearinghouse with 19.2% share in 201419
Commercial Banking
# of states with Middle Market banking presence # of states with top 3 Middle Market banking
market share8
Multifamily lending9
Gross Investment Banking revenue ($ in billions) % of North America Investment Banking fees
22 6 #28 $0.7 16% 30 10 #1 $2.0 35%
Average loans grew by 13% CAGR 2006-201420
Industry-leading credit performance TTC — 8 consecutive quarters of net recoveries or single-digit NCO rate
Leveraging the irm’s platform — average ~9 products/client
Asset Management
Global active long-term open-end mutual fund AUM lows10
AUM market share10
Overall Global Private Bank (Euromoney)
Client assets market share11
U.S. Hedge Fund Manager (Absolute Return)12 AUM market share12
#2 1.8% #5 ~1% #1113 1.4% #1 2.5% #1 ~2% #2 3.4%
84% of 10-year long-term mutual fund AUM in top 2 quartiles21
23 consecutive quarters of positive long-term AUM lows Revenue growth >70% and long-term AUM growth >80%
since 2006
Doubled Global Wealth Management client assets (2x industry rate) since 200622
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I . A N O U TSTA N D I N G F R A N C H I S E
Our mix of businesses works for clients — and for shareholders
All companies, including banks, have a slightly diferent mix of businesses, products and services. The most critical question is, “Does what you do work for clients?” Our franchise does work for clients by virtue of the fact that we are gaining share in each of our businesses, and it works for shareholders by virtue of the fact that we are earning decent returns – and some of our competi-tors are not.
Other considerations are whether your company has “moats” – is it protected in some way from debilitating competition or events? And has it performed consistently – in good times and in bad? We believe that we have well-fortiied moats in the form of economies of scale, brand, expertise, tech-nology and operations, and – importantly – competitive advantages created by our ability to cross sell (more on this later in this letter). In addition, we have performed fairly consis-tently in good times and in bad. Even in 2008, the worst year in perhaps 75 years for inancial companies, we earned 6% return on common tangible equity – not great but
not bad, all things considered. Additionally, we have embedded strengths that are hard to replicate – the knowledge and cohesiveness of our people, our long-standing client rela-tionships, our technology and product capa-bilities, our fortress balance sheet and our global presence in more than 100 countries.
Our mix of businesses leads to efective cross sell and substantial competitive advantages. We are not a conglomerate of separate, unrelated businesses — we are an operating company providing inancial services to consumers, companies and communities
A conglomerate is a group of unrelated busi-nesses held under one umbrella holding company. There is nothing wrong with a conglomerate, but we are not that. In our case, whether you are an individual, a company (large or small) or a government, when you walk in the front door and talk with our bankers, we provide you with essen-tial inancial products, services and advice. We have a broad product ofering and some distinct capabilities, which, combined, create a mix of businesses that works well for each of our client segments.
Consumer Satisfaction Score: 2010-20141
2014 2013
2012 2011
2010
Chase Industry average
Big banks Regional banks Midsized banks
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I . A N O U TSTA N D I N G F R A N C H I S E
Part of our mix of businesses, however, is not unique. While we divide our company into four distinct businesses, the truth is that many regional banks do a lot of what three of our four businesses do (i.e., Chase Consumer & Community Banking, Commercial Banking and Asset Manage-ment). The biggest diference between us and regional banks is our global Corpo-rate & Investment Bank (and the non-U.S. part of our Asset Management business).
Our broad product set and some of our unique capabilities (some we inherited, and some we built carefully over time), combined with efective cross sell, create substantial competitive advantage. The examples below make some of those advantages clear:
• Commercial Banking now generates 35% of our U.S. investment banking business. This means we are able to bring JPMorgan Chase’s exceptional Investment Bank to serve hundreds of midsized corporations and institu-tions with the best global investment banking products and services in the industry. We can do this because our Commercial Bank is in hundreds of towns across the country where we can serve clients locally – person to person – and also bring the best of JPMorgan Chase to them.
• Around the world, we can bring excep-tional private banking services to CEOs and company owners or help private banking clients with their global commercial banking needs.
• Because of our international footprint, we bring global banking services – from cash management to M&A – to approximately 2,500 of our more than 20,000 Corporate Client Banking and Middle Market Banking clients, who are rapidly expanding overseas and who need these services from someone they know and can trust.
• We market Chase Paymentech, our merchant acquirer, through our branches to small businesses, through the Commer-cial Bank to midsized companies and through our Corporate & Investment Bank to large, multinational corporations.
America’s inancial system is still the best the world has ever seen — it is large and diverse — and it serves the best economy the world has ever seen, which also is large and diverse
America’s inancial system still is the best the world has ever seen, and it includes not just banks but asset managers, private equity, venture capital, individual and corporate investors, non-bank inancial companies, and public and private markets. In fact, in the United States, banks are a much smaller part of the inancial system and the economy than in most other countries. And there is a great need for the services of all banks, from large global banks to smaller regional and community banks.
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I . A N O U TSTA N D I N G F R A N C H I S E
bonds to assist municipalities and hospitals, and green bonds to inance environmentally beneicial projects such as green buildings, clean water and renewable energy. As a irm, we spend approximately $700 million a year on research so that we can educate investors, institutions and governments about econo-mies, markets and companies. The needs of these clients will be met – one way or another – by large inancial institutions that can bear the costs and risks involved. Simply put, if it is not done by a large American inancial institution, it will be done by a large non-American inancial institution.
Regional and community banks are critical to their communities — in fact, we are a huge supporter and their largest banking partner. These banks are deeply embedded in their communities, many of which are not served by larger banks. They have an intimate knowledge of the local economy and local small businesses, which allows them to cost-efectively serve those clients. JPMorgan Chase, as a traditional “money center bank” and “bankers’ bank,” in fact, is the largest banker in America to regional and commu-nity banks. We provide them with many services so they can continue to serve their clients. For example, we directly lend to them, we process payments for them, we inance some of their mortgage activities, we raise capital for them (both debt and equity), we advise them on acquisitions, and we buy and sell securities for them. We also provide them with interest rate swaps and foreign exchange both for themselves – to help them hedge some of their exposures – and for their clients.
However, large does not necessarily mean complex (and things should be complex only for a good reason)
Many of the activities we do that are consid-ered large are easy to understand. All of our 5,600 Chase consumer branches do essen-tially the same thing, and many of our large global transactions are not any more compli-cated than a loan for a middle market client.
While we agree with the concept that you should keep things as simple as possible, some things, by their very nature, are more complex. And that complexity cannot be reduced by wishful thinking. In fact, basic lending, whether to a large company or a midsized company, is one of the more complex things we do because one must understand the economy, the nature of the business and often the types of collat-eral involved. There are many judgmental factors to consider as well, which might include the character of the borrower, the growth prospects of the business, and an understanding of the products and services and technology of the business.
There are understandable questions about the role that large inancial institutions play. Some of these questions make people nervous, in part because they do not under-stand the larger picture. These are important questions, and we always are willing to help explain what we do and why we do it. Taken in small component pieces, these activities generally are easier to understand. While some may criticize a bank’s activities instead of taking the time to understand them, this does not contribute to a genuinely construc-tive dialogue around the role of banks.
People also should ask themselves one basic question: Why do banks ofer these services? The fact is, almost everything we do is because clients want and need our various and sometimes complex services. (We do many activities that are ancillary to clients’ direct needs, but we must do these things to provide clients with what they need. For example, in order to support our operation, we run global data centers, we hedge our own exposures and we maintain liquid pools of investments.)
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I . A N O U TSTA N D I N G F R A N C H I S E
better of or worse of because of some of the great products and services that come with complexity? The answer in our opinion is a resounding yes, though you should always strive to minimize the risks. But we want to acknowledge that the diference with banks, as pointed out by critics, is that if and when they make mistakes, they can severely harm the economy. This concern is legitimate, and I will talk about it in a later section.
Larger does not necessarily mean more risky
For example, many large banks had no problem navigating the inancial crisis, while many smaller banks went bankrupt. Many of these smaller banks went bankrupt because they were undiversiied, meaning that most of their lending took place in a speciic geography. A good example was when oil collapsed in the late 1980s. Texas banks went bankrupt because of their direct exposure to oil companies and also because of their exposure to real estate whose value depended largely on the success of the oil business. Since the crisis began seven years ago, more than 500 smaller banks have gone bankrupt, and JPMorgan Chase has contrib-uted approximately $8 billion to the Federal Deposit Insurance Corporation to help pay for the resolution of those banks.
And, yes, there are both costs and beneits to size and complexity
The beneits of size are obvious: huge econo-mies of scale, the ability to serve large clients and make large investments, and safe diversi-ication, among others. And, yes, there some-times are clear negatives to size – usually in the form of arrogance, greed, complacency or lack of attention to detail. (There also are many small businesses alicted with these diseases – they kill companies both large and small.) Good companies get the beneits of size and continuously are ighting of the negatives. And there are lots of winners and losers, particularly as industries consolidate. In every industry, you will see companies that beneit from size – and those that don’t.
Our size and strength allow us to create beneits for society by helping economies and communities around the world grow and prosper
We are able to do our part in supporting communities and economies around the world because we are strong, stable and permanent. And because of this strength and stability, we can continue to support our clients in good times and, more important, in the toughest of times. The most important thing we can do is keep our company healthy and vibrant so that we can serve the needs of customers, consumers and businesses and help local economies and the thousands of cities and various communities around the world where we operate to grow and prosper.
In addition, we strongly believe in being a good corporate citizen. We are one of the most philanthropic companies in the world (we give away more than $200 million a year), but we are able to do much more than provide money. We bring the skills, resources and global knowledge of our entire irm to support the economic growth and prog-ress of communities across the globe. One example is our research, such as studying how our communities analyze labor market conditions so they can get better at training people for jobs or how cities can further develop their economies. See Peter Scher’s Corporate Responsibility letter on page 58 for more details on our eforts to support cities and communities around the globe. Following are three unique initiatives that we’d like to focus on:
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• We supported nonproit organizations, including Focus: HOPE, in their eforts to help people gain skills from job training programs.
• We helped small businesses get access to the advice, training and other resources needed to grow, including a new commer-cial kitchen at Eastern Market that will allow more food businesses to expand.
• We provided lending for development – both commercial development to let businesses like Global Titanium expand jobs and residential development and new construction of apartment buildings in Detroit’s urban core and neighborhoods.
• We created the Detroit Service Corps to bring more than 50 of our top managers to work full time with Detroit nonproits to help them analyze challenges, solve problems and give them the best chance for success.
Helping Detroit’s economy recover and thrive would be a shining example of Amer-ican resilience and ingenuity at work.
Military and veterans. Another efort that we want you to know about is what JPMorgan Chase has done to help position military members, veterans and their families for success in their post-service lives through employment, housing and educational programs. In 2011, JPMorgan Chase and 10 other companies launched the 100,000 Jobs Mission, setting a goal of collectively hiring 100,000 veterans. The 100,000 Jobs Mission now includes more than 190 companies that have collectively hired more than 217,000 veterans since 2011 and has pledged to hire a total of 300,000 veterans. JPMorgan Chase hired over 1,800 veterans in 2014, nearly a 40% year-over-year increase, for a total of nearly 8,700 veterans hired since 2011. Further, we expanded our employ-ment programs to address the unique needs of women veterans and military spouses. We hope that this makes you as proud of JPMorgan Chase as it does for all of us. granularity, diversity and
interconnected-ness of the global economic system to inform smarter decisions and good policies that advance global prosperity for consumers, businesses and countries. The research agenda will include groundbreaking analytic work on the inancial behavior of individ-uals, insights on the small business sector, and expert proiling of global trade and capital lows.
Detroit. We brought all of our resources to bear in a special, coordinated way, which we never have done before, to try to help the city of Detroit. We have been doing business there for more than 80 years and already are the largest consumer, commercial and investment bank serving Detroit’s consumers and companies. But we wanted to do more to help kick-start the city’s recovery. This efort is a $100 million commitment, which includes investments, philanthropy and our people working in tandem with a set of city leaders who have come together to work toward a common purpose. Our initial interest in undertaking this efort was made possible because of our faith in the extraordi-nary work and talent of Mayor Duggan and Gov. Snyder (and Kevyn Orr, who recently left as Emergency Manager). Their dedica-tion to coherently, comprehensively and pragmatically attacking the city’s enormous problems made us want to do more. In fact, everything we have done to help is the result of asking a broad array of the city’s leaders what they really needed and then working with them to come up with some creative solutions. Let me give just a few examples:
• We expanded the city’s efort to systemati-cally map every single parcel in Detroit and provided the technology assistance so that residents can use their phones to continually update the database.
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II.
Our paramount responsibility to society and to our clients is to be there in good times and bad times
We have a huge obligation to society – not only must we never fail, but we need to be steadfast. Never failing means having the inancial strength, liquidity, margins, and strong and diverse earnings where you can weather any storm. It also means having the ability to adapt, survive and even thrive through the cycles.
Steadfast means that you will be there no matter what happens, and being there means that you can continue to properly serve your clients even in tough times. In the toughest of times, it is not about making a proit. It is about helping your clients survive. I should point out that in the toughest of times, particularly in 2009, JPMorgan Chase rolled over and extended credit to small and medium-sized businesses a total of $63 billion, to governments and nonproits a total of $110 billion, and to large corporations a total of $1.1 trillion. I will talk more about this later.
We extensively manage our risks so that we can survive in any scenario. The Federal Reserve’s stress test is a tough measure of our survival capability — though our ability to survive is stronger than that test implies
We are fanatics about stress testing and risk management. It is in our best interest to protect this company – for the sake of our shareholders, clients, employees and commu-nities. If you went to our risk committee meetings, you would see a number of profes-sionals working to thoughtfully manage and reduce our risk – we don’t want a bunch of cowboys trying to increase it. We run hundreds of stress tests a week, across our global credit and trading operations, to ensure our ability to withstand and survive many bad scenarios. These scenarios include events like what happened in 2008, other
historically damaging events and also new situations that might occur. Our stress tests include analyzing extremely bad outcomes relating to the Eurozone, Russia and the Middle East.
Regarding the Eurozone, we must be prepared for a potential exit by Greece. We continu-ally stress test our company for possible repercussions resulting from such an event (even though, in our opinion, after the initial turmoil, it is quite possible that it would prompt greater structural reform eforts by countries that remain). Also regarding geopo-litical crises, one of our irm’s great thinkers, Michael Cembalest, reviewed all of the major geopolitical crises going back to the Korean War, which included multiple crises involving the Soviet Union and countries in the Middle East, among others. Only one of these events derailed global inancial markets: the 1973 war in the Middle East that resulted in an oil embargo, caused oil prices to quadruple and put much of the world into recession. We stress test frequently virtually every country and all credit, market and interest rate exposures; and we analyze not only the primary efects but the secondary and tertiary consequences. And we stress test for extreme moves – like the one you recently saw around oil prices. Rest assured, we extensively manage our risks.
The Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) stress test is another tough measure of our survival capability. The stress test is good for our industry in that it clearly demonstrates the ability of each and every bank to be properly capitalized, even after an extremely diicult environment. Speciically, the test is a nine-quarter scenario where unemployment suddenly goes to 10.1%, home prices drop 25%, equities plummet approximately 60%, credit losses skyrocket and market-making loses a lot of money (like in the Lehman Brothers crisis).
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To make sure the test is severe enough, the Fed essentially built into every bank’s results some of the insuicient and poor decisions that some banks made during the crisis. While I don’t explicitly know, I believe that the Fed makes the following assumptions:
• The stress test essentially assumes that certain models don’t work properly, partic-ularly in credit (this clearly happened with mortgages in 2009).
• The stress test assumes all of the negatives of market moves but none of the positives.
• The stress test assumes that all banks’ risk-weighted assets would grow fairly signii-cantly. (The Fed wants to make sure that a bank can continue to lend into a crisis and still pass the test.) This could clearly happen to any one bank though it couldn’t happen to all banks at the same time.
• The stress test does not allow a reduction for stock buybacks and dividends. Again, many banks did not do this until late in the last crisis.
I believe the Fed is appropriately conserva-tively measuring the above-mentioned aspects and wants to make sure that each and every bank has adequate capital in a crisis without having to rely on good management decisions, perfect models and rapid responses.
We believe that we would perform far better under the Fed’s stress scenario than the Fed’s stress test implies. Let me be perfectly clear – I support the Fed’s stress test, and we at JPMorgan Chase think that it is important that the Fed stress test each bank the way it does. But it also is important for our share-holders to understand the diference between the Fed’s stress test and what we think actu-ally would happen. Here are a few examples of where we are fairly sure we would do better than the stress test would imply:
• We would be far more aggressive on cutting expenses, particularly compensa-tion, than the stress test allows.
• We would quickly cut our dividend and stock buyback programs to conserve capital. In fact, we reduced our dividend dramatically in the irst quarter of 2009 and stopped all stock buybacks in the irst quarter of 2008.
• We would not let our balance sheet grow quickly. And if we made an acquisition, we would make sure we were properly capitalized for it. When we bought Wash-ington Mutual (WaMu) in September of 2008, we immediately raised $11.5 billion in common equity to protect our capital position. There is no way we would make an acquisition that would leave us in a precarious capital position.
• And last, our trading losses would unlikely be $20 billion as the stress test shows. The stress test assumes that dramatic market moves all take place on one day and that there is very little recovery of values. In the real world, prices drop over time, and the volatility of prices causes bid/ask spreads to widen – which helps market-makers. In a real-world example, in the six months after the Lehman Brothers crisis, J.P. Morgan’s actual trading results were $4 billion of losses – a signiicant portion of which related to the Bear Stearns acqui-sition – which would not be repeated. We also believe that our trading exposures are much more conservative today than they were during the crisis.
Finally, and this should give our shareholders a strong measure of comfort: During the
actual inancial crisis of 2008 and 2009, we never lost money in any quarter.
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consistent over time and is not in any way capricious. Capital is precious, and it needs to be deployed intelligently in the business or properly returned to shareholders. If share-holders do not have a clear understanding of capital management and have unreasonable expectations, then that capital will be devalued. This is a bad outcome for all involved.
While there always will be cycles, we need to keep our eye on the important things, too — the outlook for long-term growth is excellent
The needs of countries, companies, investor clients and individuals will continue to grow over time. The chart below shows some of the long-term growth that is expected in some critical areas, including the underlying growth of gross domestic product and trade, investable/inancial assets, infrastructure and capital markets activities. This is the fuel that will drive our business in the future.
Therefore, we take a long-term perspective on investing. How we currently view low net interest margins is a good example of making decisions for the long run
To capture our share of the growth in our underlying businesses, we need to continu-ally invest in bankers, branches and capabili-ties (research, products and technology) to drive down our costs and better serve our clients. It is a lot of hard work that needs to be supported by all of our critical functions, from inance and human resources to opera-tions and controls. This kind of investing should not be done in a stop-start way to manage short-term proitability.
Quarterly earnings – even annual earnings – frequently are the result of actions taken over the past ive or 10 years. Our company continued to invest through the crisis – often when others could not – in order to capture future growth.
Global Macro Themes
2014 2024 Growth
World gross domestic product
($ in trillions)
$ 78 $ 133 5.5% CAGR
World exports
($ in trillions)
$ 22 $ 38 1.7x
Investable assets
($ in trillions)
$ 263 $ 481 6% CAGR
12% emerging
4% developed
Infrastructure spend
($ in trillions)
$36 over last 18 years $57 over next 18 years 1.6x
2.6x emerging
1.1x developed
Number of companies with $1+ billion revenue
8,000 15,0001 1.9x
3.8x emerging
1.2x developed Source: International Monetary Fund, World Bank, McKinsey, JPMorgan Chase analysis
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A very good current example of how we view investing and long-term decision making is how we are dealing with the squeeze on our net interest margins (NIM) due to extremely low interest rates. The best example of this is in our consumer business, where NIM has gone from 2.95% to 2.20% (from 2009 to 2014). This spread reduction has reduced our net interest income by $2.5 billion, from $10 billion to $7.5 billion – or if you look at it per account, from $240 to $180. Since we strongly believe this is a temporary phenomenon and we did not want to take more risk to increase our NIM (which we easily could have done), we continued to open new accounts. Over those years, we added 4.5 million accounts – and, in fact, very good sizable accounts. This has reduced our operating margins from 36% to 32%, but we don’t care. When normal interest rates return, we believe this will add $3 billion to revenue and improve our oper-ating margin to more than 40%.
Our long-term view means that we do not manage to temporary P/E ratios — the tail should not wag the dog
Price/earnings (P/E) ratios, like stock prices, are temporary and volatile and should not be used to run and build a business. We have built one great franchise, our way, which has been quite successful for some time. As long as the business being built is a real franchise and can stand the test of time, one should not overreact to Mr. Market. This does not mean we should not listen to what investors are saying – it just means we should not overreact to their comments – particularly if their views relect tempo-rary factors. While the stock market over a long period of time is the ultimate judge of performance, it is not a particularly good judge over a short period of time. A more consistent measure of value is our tangible book value, which has had healthy growth over time. Because of our conservative accounting, tangible book value is a very good measure of the growth of the value of our company. In fact, when Mr. Market gets very moody and depressed, we think it might be a good time to buy back stock.
I often have received bad advice about what we should do to earn a higher P/E ratio. Before the crisis, I was told that we were too conservatively inanced and that more leverage would help our earnings. Outsiders said that one of our weaknesses in ixed income trading was that we didn’t do enough collateralized debt obligations and structured investment vehicles. And others said that we couldn’t aford to invest in initiatives like our own branded credit cards and the buildout of our Chase Private Client franchise during the crisis. Examples like these are exactly the reasons why one should not follow the herd.
While we acknowledge that our P/E ratio is lower than many of our competitors’ ratio, one must ask why. I believe our stock price has been hurt by higher legal and regulatory costs and continues to be depressed due to future uncertainty regarding both.
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again – in fact, I don’t think our Board would let me take the call. The WaMu deal might still make sense but at a much lower price to make up for the ongoing legal uncertainty (including the government’s ability to take away our bargained-for indemnities). I did not, and perhaps could not, have anticipated such a turn of events. These are expensive lessons that I will not forget.
Part of the issue around legal costs is that banks are now frequently paying penalties to ive or six diferent regulators (both domestic and international) on exactly the same issue. This is an unprecedented approach that probably warrants a serious policy discussion – especially if those regulators (as at least some of them have acknowledged) don’t take into account what is being paid to the others. For now, it’s simply a reality for big banks, and certainly for us, that when one or more employees do something wrong, we’ll hear from multiple regulators on the subject.
The good news is that our legal costs are coming down and, we hope, will normalize by 2016.
Uncertainty remains around regulatory require-ments, though we believe this will diminish over time, too. That uncertainty is particularly acute around the extra capital that JPMorgan Chase will have to hold because of the new Global Systemically Important Bank (G-SIB) rules, the ultimate impact of the Volcker Rule, total loss-absorbing capacity, CCAR and Recovery & Resolution. And it’s because of that uncertainty that a majority of the time I spend with analysts and investors these days is devoted to regulation. Very little time is spent talking about the actual business, like client transactions, market
share gains or other business drivers. Many questions still remain, and they are hard to explain or are diicult to answer, including: Why did American regulators simply double the G-SIB capital requirements for American banks versus all other global banks? Will higher capital requirements be added later? Given that much uncertainty, which is greater for JPMorgan Chase than for most other banks, it is understandable that people would pay less for our earnings than they otherwise might pay.
Having said all this, the contours of all of the new regulations have emerged, and we believe that regulatory uncertainty will diminish over time. And, we hope, so will the drag on our P/E ratio.
Think like a long-term investor, manage like an operator
21 21 We have meaningfully simpliied the company
While I have said that it is good housekeeping to keep our company as simple as possible, we have done an extraordinary amount of cleaning out this past year. More important, last year, we said that we would do it, and this year we actually did it. The chart below shows that we did it by shedding businesses, reducing products and materially de-risking by reducing certain types of clients that simply create too much risk in the new world. In total, we have reduced approximately $25 billion in assets through this efort. All of this makes the work of our compliance and control executives that much easier, as they can focus more on what’s important.
III.
We are well on our way to having fortress controls
The intense efort over the last few years now is yielding real results and will go a long way in protecting the company in the future. When we are done, we hope not just to have met the heightened expectations of our regu-lators but to have exceeded them. In addition to successfully completing CCAR (which we will strive to do every year), there are other examples of tangible progress. Following are some of our accomplishments:
• Strengthened compliance. We have added approximately 8,000 people across the irm with a mission to strengthen our compliance capabilities. We have further aligned global leadership to drive focus and consistency across key risk areas such as AML/BSA (Anti-Money Laundering/
W E W I L L S U CC E SS F U L LY N AV I G AT E T H E N E W G LO BA L
F I N A N C I A L A R C H I T EC T U R E ( A N D W E A R E W E L L O N
O U R WAY TO H AV I N G FO RT R E SS CO N T R O LS )
Executed Signiicant Business Simpliication Agenda
Operating with fortress principles
1Does not include impact of the One Equity Partners and Private Equity portfolio sale 2EXIM = Export–Import Bank; ECA = Export Credit Agency
Simplifying our business
ü Completed the spin-out of One Equity Partners and closed on the sale of a portion of our Private Equity portfolio
ü Exited physical commodities business
ü Sold Global Special Opportunities Group portfolio
ü Exit in process of majority of Broker Dealer Services business
ü Terminated transaction services for ~500 Foreign Correspondent Banking clients
ü Ceased originating student loans
ü Announced exit of Sears Canada and several smaller non-core card partnerships
ü Announced exit of International Commercial Card
ü Sold interest in Carlson Wagonlit Travel agency
ü Sold Retirement Plan Services unit
ü Exited prepaid card and Order to Pay businesses
ü Sold health savings account business
Incremental inancial impact1
($ in billions) 2015 2016 and beyond
Revenue $1.6 $0.7
Expense $1.6 $0.6
Other meaningful business actions
ü Simpliied Mortgage Banking products from 37 to 18 products as of 2014, with a target of further reducing to 15
ü Rationalized Global Investment Management products: reduced U.S. funds # by net 6%, Asia funds net 4% and Europe funds net 2% in 2014
ü De-risking through client selection —discontinuing certain businesses with select clients:
ü Exited ~8,000 clients in Business Banking and Commercial Banking
ü Exited ~5,500 foreign Politically Exposed Person relationships
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Bank Secrecy Act), iduciary risk, market conduct risk, employee compliance and privacy. We have enhanced our policies and implemented new procedures and technology support.
• New anti-money laundering systems deployed. We have implemented Mantas, an
industry-leading transaction monitoring platform, for all U.S. dollar payment transactions. This provides a signii-cant improvement in our transaction monitoring capabilities and allows us to decommission multiple less efective legacy systems. We also have upgraded our processes and technology support in AML investigations and sanctions. We have more to do, but a strong foundation is in place.
• Foreign correspondent banking review. Given the regulatory scrutiny around these activities, we have exited many relation-ships with foreign correspondent banks where we have risk-related concerns or where we needed to simplify our busi-ness. In addition to the relationship exits, we have improved our controls for foreign correspondent banking activities, including enhancing our technology to better monitor U.S. dollar correspondent bank transactions – which allowed us to implement 10 new transaction monitoring scenarios to better track millions of trans-actions each day.
• Enhanced controls in connection with payday lender practices. We reviewed our poli-cies, systems and processes to decrease inancial burdens on our customers and hinder payday lenders’ ability to engage in predatory collection practices. And then we did the following: eliminated multiple return item fees, enhanced our policy and systems for stop payment requests, and allowed account closure with a pending transaction and/or a negative balance. (NACHA rules originally did not allow a bank to close an account with a pending transaction. Consumers wanted to close
the account to stop payday lenders from trying to take money from the account on a daily basis.) In addition, we are working with NACHA to develop new standards for the entire industry.
• Mortgage servicing improvements. As one of the United States’ largest mortgage lenders, some of our practices were not designed to handle the unprecedented increase in volume that occurred as a result of the inancial crisis. Therefore, we reviewed the areas that needed enhance-ment and took the appropriate actions. We focused on improving our operating model, we dedicated more than 10,000 employees to assist customers that were having diiculty making payments, and we improved our communications with customers to provide better counseling and more clarity about the options avail-able. We also invested more than 280,000 hours of our technology employees’ time to improve our Mortgage Servicing business, including enhancing the loan modiication application to improve the systems that track and manage customer complaints and responses.
• Model review. More than 300 employees are working in Model Risk and Devel-opment. In 2014, this highly special-ized team completed over 500 model reviews, implemented a system to assess the ongoing performance of the 1,000+ most complex models in the irm, and continued to enhance capital and loss models for our company.
Fortunately, most of our strategies stay essentially the same
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However, a small percentage of our products and services will require some surgery (more on that later). In addition, because some companies are making large strategic moves, we would expect to see an ongoing shift in market shares and pricing. It is possible that we will beneit from both of these trends.
While uncertainty remains, the contours to the new rules are largely known, and we have made enormous progress adapting to them
The chart below describes the new rules and regulations with which we need to comply. And remember, these new rules afect each product, business, legal entity and client. Every requirement has a few hundred
2015 Financial Architecture
Description Selected requirements Selected JPMorgan Chase actions
Capital
Improving the banking sector’s ability to absorb losses arising from inancial and economic stress
750+ requirements with 21 regulators involved
~27 diferent capital ratio requirements
950+ people
20,000+ pages of supporting documentation
225+ new models
Liquidity
Ensuring banks hold sufficient liquid assets to survive acute liquidity stress
Prevent overreliance on short-term wholesale funding
500+ requirements
15+ jurisdictional variations expected
400+ people
Process and store 1+ billion records per day from 200+ feeds
Recovery & Resolution
Ensuring the resiliency of irms to prevent failure
Preparing living wills
Annual global recovery plan
Annual resolution plans for 34 entities, with plans by business and critical operations
10+ jurisdictions issued or proposed Recovery & Resolution regulation, with more expected
1,000+ people
1+ million work hours devoted annually
Mortgages
Reforming the nation’s housing inance system
Expanding origination, servicing and securitization regulation
90+ new, proposed or amended rules, notices and regulations contained within ~13,000 pages of regulatory text
~2,000 pages of systemic reform legislation introduced
~800,000 compliance training hours
~1.4 million work hours dedicated to systems and process implementation
Data reporting and management
Enhancing data-related capabilities by increasing accountability and transparency for data quality
Improving the irm’s ability to collect, manage and report on data in order to facilitate greater market and product transparency
11 principles with 1,000+ requirements
3,300+ pages of requirements, principles and guidance
1,000+ people working across 43 business groups
120+ distinct programs with 1,400+ milestones
Derivatives
Enhancing pre- and post-trade transparency
Promoting use of electronic trading venues and central clearing
Bolstering capital and margin requirements
99 proposed or inalized regulations (U.S.) and 237 inal articles (European Union)
3,150+ pages of requirements and guidance
700+ people
60 workstreams
Volcker
Restricting banks from undertaking certain types of market activities
Controlling risks associated with certain trading and funds-related activity
1,000+ pages covering 36 requirements, with 5 regulators involved
300+ people
7 trading metrics reported monthly across 15 business areas
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detailed rules around it to which we need to adapt. While it is a lot of work, we believe we will be able to successfully accomplish all of it. We have spoken about many of these rules and requirements in the past so we won’t go into greater detail here, other than on the new G-SIB capital rules, which will have some material efects on some of our businesses.
Intense efort is going into understanding and adapting to the new G-SIB capital rules. Last year, we described how we had to manage the company to satisfy several new constraints (all of the liquidity, leverage, capital and CCAR requirements). To do this, we were pushing these new rules and requirements all the way down to the product and client levels. The G-SIB capital rules are a new constraint that we also need to manage to, and for JPMorgan Chase, they possibly are the most important constraint, though this may change over time. There-fore, we also need to push the new G-SIB rules to the product and client levels.
Unlike RWA, which lets one measure the risk embedded in each asset and, thus, the capital needed to hold against it, G-SIB is multivariate. G-SIB is not a simple calcula-tion. It requires thousands of calculations, and it does not look at just assets – it looks at products, services, assets, type of client (i.e., international and inancial or corporate) and collateral type, among others in order to determine capital levels.
G-SIB will have its highest impact on non-operating deposits, gross derivatives, the clearing business in general and certain clients, particularly inancial institutions, including central banks. At the end of the day, we believe that we can manage through this process and reduce our capital require-ments while maintaining our core fran-chises. To the extent that these changes materially impact clients, we will do it thoughtfully and carefully and help them ind appropriate alternatives.
G-SIB is not a direct measure of risk. The G-SIB calculations show that JPMorgan Chase is the most Global Systemically Important Bank, and, therefore, we have to hold more capital than any other bank in the world. Some of our shareholders believe that this designa-tion implies that before the addidesigna-tional capital is held, we may be the riskiest institution, too. But G-SIB is not a true measure of risk, like RWA or CCAR. (And as shareholders have mentioned to me, many of these measures do not indicate how they would look at risk; i.e., margins, earnings diversi-ication and actual performance in tough times, in addition to criteria such as capital and liquidity.)
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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 relect 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 irst line of defense in a crisis situ-ation and serves as the road map for how to prevent the irm from actually failing. It gives the regulators the comfort that the irm has done suicient upfront planning and analysis and has an outline for how the irm could recover if confronted with a severe inancial crisis. The plan essentially helps the regulators understand the comprehensive set of alternatives and actions available to enable the irm 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 sufer. 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 irm’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.
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be completed in 2015. First, the regulators have almost inished plans around total loss-absorbing capacity, which will require large banks to hold a lot of additional long-term debt, which could be converted to equity in the event of a failure and thereby enable the irm to remain open to serve customers and markets. Second, the industry agreed to put in place speciic rules and guidelines on how to deal globally with derivatives contracts of a failed institution. This gives regulators and governments the knowledge that, in a failure, derivatives contracts can be properly managed and will not make the situation worse.
The industry will be stronger and safer because of all of the new regulations, and the future is bright for well-run banks
