Morgan manoeuvres




JPM's heavier than most capital burden underpins its keenness for CRT


JP Morgan Chase has led the charge in the US CRT market in the last 12 months, but its urgency to make use of the mechanism has a lot to do with its specific and onerous regulatory capital burden, say market sources.


It is the biggest bank in the US with assets of around $2.7trn, almost $700bn more than its closest rival Bank of America. It also bears the heaviest capital burden, and, over the last year or so, it has grown even heavier.


In its Q3 earnings call on October 13, cfo Jennifer Piepszak said she expects the bank will probably be assigned a 4% GSIB surcharge once the Federal Reserve had completed its annual review of its balance sheet. This is a 0.5% bump from the current capital add-on of 3.5% - already the highest tier - and will increase its regulatory capital requirement by billions of dollars.


On November 27, it was reported that the Federal Reserve had assessed JP Morgan's GSIB systemic risk score to be 731.5 at the end of Q3, up from 728.17 at the end of Q2. This does indeed put JP Morgan in line for a 4% surcharge unless the risk footprint can be shrunk to 730 by the end of this month.


This follows the news in June that, following the Fed’s annual stress tests, JP Morgan’s common equity tier 1 (CET1) capital ratio threshold had increased from 10.5% to 11.3%. This extra 0.8% was due to the Fed’s decision to introduce a new stress capital buffer to replace the previous capital conservation buffer. While the latter was a flat number, floored at 2.5%, the new stress capital buffer is based upon results of stress testing, and can thus increase, inflating the overall CET number.

Once again, this adds billions to the required thickness of JP Morgan’s regulatory capital buffer. Citigroup’s required CET ratio remained unchanged at 10% and Bank of America was also unchanged at 9.5%.


Based on 1Q RWA numbers, it increased JP Morgan’s required CET1 ratio from $168bn to $181bn, and, by 3Q this had increased still further to $198bn.


A lot of these pressures were anticipated in comments made at the 2019 Investor Day, held on February 26. On that day, it led what one source in the CRT market describes as an “uncharacteristically candid discussion around RWA constraints, especially for a US bank that is always supposed to have a fortress balance sheet.”


The presentation began with a slide that showed the gap between the assessment of RWA using standardized calculation and advanced calculation had grown markedly over 2018 to almost $100bn. Using the standardized approach, RWA was around $1.53trn but it was about $1.43trn using advanced methodology.


Subsequent incremental growth would be capitalized under standardized methodology, which is more expensive and less risk-sensitive, it said.


In the loan market, the focus henceforth would be on higher quality lending and the bank warned investors to expect a “slower pace of growth. Thus, “as marginal economics evolve, the Firm optimizes its balance sheet accordingly,” it said.


The significantly greater use of the CRT mechanism by JP Morgan over the past year, with six deals in total referencing mortgages, auto loans and corporate loans, must be seen in this context, therefore, of rapidly accelerating balance sheet pressures.

JP Morgan has declined to comment.


Simon Boughey


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