JPMorgan Chase & Co. - Yale School of Management · JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968,

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10K 1 corp10k2011.htm FORM 10K

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10KAnnual report pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

For the fiscal year ended Commission fileDecember 31, 2011 number 15805

JPMorgan Chase & Co.(Exact name of registrant as specified in its charter)

Delaware 132624428(State or other jurisdiction ofincorporation or organization)

(I.R.S. employeridentification no.)

270 Park Avenue, New York, New York 10017(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (212) 2706000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registeredCommon stock The New York Stock Exchange The London Stock Exchange The Tokyo Stock ExchangeWarrants, each to purchase one share of Common Stock The New York Stock ExchangeDepositary Shares, each representing a onefour hundredth interest in a share of 8.625% NonCumulative Preferred Stock, Series J

The New York Stock Exchange

Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan Chase Capital X The New York Stock ExchangeGuarantee of 5.875% Capital Securities, Series K, of J.P. Morgan Chase Capital XI The New York Stock ExchangeGuarantee of 6.25% Capital Securities, Series L, of J.P. Morgan Chase Capital XII The New York Stock ExchangeGuarantee of 6.20% Capital Securities, Series N, of JPMorgan Chase Capital XIV The New York Stock ExchangeGuarantee of 6.35% Capital Securities, Series P, of JPMorgan Chase Capital XVI The New York Stock ExchangeGuarantee of 6.625% Capital Securities, Series S, of JPMorgan Chase Capital XIX The New York Stock ExchangeGuarantee of 6.875% Capital Securities, Series X, of JPMorgan Chase Capital XXIV The New York Stock ExchangeGuarantee of FixedtoFloating Rate Capital Securities, Series Z, of JPMorgan Chase Capital XXVI The New York Stock ExchangeGuarantee of FixedtoFloating Rate Capital Securities, Series BB, of JPMorgan Chase CapitalXXVIII

The New York Stock Exchange

Guarantee of 6.70% Capital Securities, Series CC, of JPMorgan Chase Capital XXIX The New York Stock ExchangeGuarantee of 7.20% Preferred Securities of BANK ONE Capital VI The New York Stock ExchangeKEYnotes Exchange Traded Notes Linked to the First Trust Enhanced 130/30 Large Cap Index The New York Stock ExchangeAlerian MLP Index ETNs due May 24, 2024 NYSE Arca, Inc.JPMorgan Double Short US 10 Year Treasury Futures ETNs due September 30, 2025 NYSE Arca, Inc.JPMorgan Double Short US Long Bond Treasury Futures ETNs due September 30, 2025 NYSE Arca, Inc.Euro Floating Rate Global Notes due July 27, 2012 The NYSE Alternext U.S. LLC

Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a wellknown seasoned issuer, as defined in Rule 405 of the Securities Act. Yes NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation ST (§ 232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK (§229.405 of this chapter) is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10K or any amendment to this Form 10K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company.See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b2 of the Exchange Act.

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Large accelerated filer Accelerated filer Nonaccelerated filer (Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act). Yes No

The aggregate market value of JPMorgan Chase & Co. common stock held by nonaffiliates as of June 30, 2011: $159,285,259,081

Number of shares of common stock outstanding as of January 31, 2012: 3,817,360,407

Documents incorporated by reference: Portions of the registrant’s Proxy Statement for the annual meeting of stockholders to be held on May 15, 2012,are incorporated by reference in this Form 10K in response to Items 10, 11, 12, 13 and 14 of Part III.

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Form 10K IndexPart I PageItem 1 Business 1 Overview 1 Business segments 1 Competition 1 Supervision and regulation 17

Distribution of assets, liabilities and stockholders’ equity; interest rates and interestdifferentials

312316

Return on equity and assets 62, 305, 312 Securities portfolio 317

Loan portfolio132154, 231252, 318

322

Summary of loan and lendingrelated commitments loss experience155157, 252255, 323

324 Deposits 272, 325 Shortterm and other borrowed funds 307Item 1A Risk factors 717Item 1B Unresolved SEC Staff comments 17Item 2 Properties 1718Item 3 Legal proceedings 18Item 4 Mine safety disclosures 18 Part II Item 5 Market for registrant’s common equity, related stockholder matters and issuer purchases

of equity securities 1820Item 6 Selected financial data 20Item 7 Management’s discussion and analysis of financial condition and results of operations 20Item 7A Quantitative and qualitative disclosures about market risk 20Item 8 Financial statements and supplementary data 20Item 9 Changes in and disagreements with accountants on accounting and financial disclosure 20Item 9A Controls and procedures 20Item 9B Other information 20 Part III Item 10 Directors, executive officers and corporate governance 21Item 11 Executive compensation 21Item 12 Security ownership of certain beneficial owners and management and related

stockholder matters 22Item 13 Certain relationships and related transactions, and director independence 22Item 14 Principal accounting fees and services 22 Part IV Item 15 Exhibits, financial statement schedules 2225

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ITEM 1: BUSINESSOverviewJPMorgan Chase & Co. (“JPMorgan Chase” or the“Firm”), a financial holding company incorporated underDelaware law in 1968, is a leading global financialservices firm and one of the largest banking institutionsin the United States of America (“U.S.”), with operationsworldwide; the Firm has $2.3 trillion in assets and$183.6 billion in stockholders’ equity as of December 31,2011. The Firm is a leader in investment banking,financial services for consumers and small businesses,commercial banking, financial transaction processing,asset management and private equity. Under the J.P.Morgan and Chase brands, the Firm serves millions ofcustomers in the U.S. and many of the world’s mostprominent corporate, institutional and governmentclients.

JPMorgan Chase’s principal bank subsidiaries areJPMorgan Chase Bank, National Association(“JPMorgan Chase Bank, N.A.”), a national bank withU.S. branches in 23 states, and Chase Bank USA,National Association (“Chase Bank USA, N.A.”), anational bank that is the Firm’s credit card–issuing bank.JPMorgan Chase’s principal nonbank subsidiary is J.P.Morgan Securities LLC (“JPMorgan Securities”), theFirm’s U.S. investment banking firm. The bank andnonbank subsidiaries of JPMorgan Chase operatenationally as well as through overseas branches andsubsidiaries, representative offices and subsidiaryforeign banks. One of the Firm’s principal operatingsubsidiaries in the United Kingdom (“U.K.”) is J.P.Morgan Securities Ltd., a subsidiary of JPMorgan ChaseBank, N.A.

The Firm’s website is www.jpmorganchase.com.JPMorgan Chase makes available free of charge,through its website, annual reports on Form 10K,quarterly reports on Form 10Q, current reports on Form8K, and any amendments to those reports filed orfurnished pursuant to Section 13(a) or Section 15(d) ofthe Securities Exchange Act of 1934, as soon asreasonably practicable after it electronically files suchmaterial with, or furnishes such material to, the U.S.Securities and Exchange Commission (the “SEC”). TheFirm has adopted, and posted on its website, a Code ofEthics for its Chairman and Chief Executive Officer,Chief Financial Officer, Chief Accounting Officer andother senior financial officers.

Business segmentsJPMorgan Chase’s activities are organized, formanagement reporting purposes, into six businesssegments, as well as Corporate/Private Equity. TheFirm’s wholesale businesses comprise the InvestmentBank (“IB”), Commercial Banking (“CB”), Treasury &

of Management’s discussion and analysis of financialcondition and results of operations (“MD&A”), beginningon page 63 and in Note 33 on pages 300–303.

CompetitionJPMorgan Chase and its subsidiaries and affiliatesoperate in a highly competitive environment.Competitors include other banks, brokerage firms,investment banking companies, merchant banks, hedgefunds, commodity trading companies, private equityfirms, insurance companies, mutual fund companies,credit card companies, mortgage banking companies,trust companies, securities processing companies,automobile financing companies, leasing companies, ecommerce and other Internetbased companies, and avariety of other financial services and advisorycompanies. JPMorgan Chase’s businesses generallycompete on the basis of the quality and range of theirproducts and services, transaction execution, innovationand price. Competition also varies based on the types ofclients, customers, industries and geographies served.With respect to some of its geographies and products,JPMorgan Chase competes globally; with respect toothers, the Firm competes on a regional basis. TheFirm’s ability to compete also depends on its ability toattract and retain its professional and other personnel,and on its reputation.

The financial services industry has experiencedconsolidation and convergence in recent years, asfinancial institutions involved in a broad range offinancial products and services have merged and, insome cases, failed. This convergence trend is expectedto continue. Consolidation could result in competitors ofJPMorgan Chase gaining greater capital and otherresources, such as a broader range of products andservices and geographic diversity. It is likely thatcompetition will become even more intense as theFirm’s businesses continue to compete with otherfinancial institutions that are or may become larger orbetter capitalized, that may have a stronger localpresence in certain geographies or that operate underdifferent rules and regulatory regimes than the Firm.

Supervision and regulationThe Firm is subject to regulation under state and federallaws in the United States, as well as the applicable lawsof each of the various jurisdictions outside the UnitedStates in which the Firm does business.Regulatory reform: On July 21, 2010, President Obamasigned into law the DoddFrank Wall Street Reform andConsumer Protection Act (the “DoddFrank Act”), whichis intended to make significant structural reforms to thefinancial services industry. As a result of the DoddFrank Act and other regulatory reforms, the Firm iscurrently experiencing a period of unprecedented changein regulation and such changes could have a significant

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Bank (“IB”), Commercial Banking (“CB”), Treasury &Securities Services (“TSS”) and Asset Management(“AM”) segments. The Firm’s consumer businessescomprise the Retail Financial Services (“RFS”) and CardServices & Auto (“Card”) segments.

A description of the Firm’s business segments and theproducts and services they provide to their respectiveclient bases is provided in the “Business segmentresults” section

in regulation and such changes could have a significantimpact on how the Firm conducts business. The Firmcontinues to work diligently in assessing andunderstanding the implications of the regulatory changesit is facing, and is devoting substantial resources toimplementing all the new rules and regulations whilemeeting the needs and

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expectations of its clients. Given the current status ofthe regulatory developments, the Firm cannot currentlyquantify the possible effects on its business andoperations of all of the significant changes that arecurrently underway. For more information, see “RiskFactors” on pages 7–17. Certain of these changesinclude the following:• Resolution plan. In September 2011, the FederalDeposit Insurance Corporation (“FDIC”) and the Boardof Governors of the Federal Reserve System (the“Federal Reserve”) issued, pursuant to the DoddFrankAct, a final rule that will require bank holdingcompanies with assets of $50 billion or more andcompanies designated as systemically important bythe Financial Stability Oversight Council (the “FSOC”)to submit periodically to the Federal Reserve, theFDIC and the FSOC a plan for resolution under theBankruptcy Code in the event of material distress orfailure (a “resolution plan”). In January 2012, the FDICalso issued a final rule that will require insureddepository institutions with assets of $50 billion ormore to submit periodically to the FDIC a plan forresolution under the Federal Deposit Insurance Act inthe event of failure. The timing of initial, annual andinterim resolution plan submissions under both rules isthe same. The Firm’s initial resolution plansubmissions are due on July 1, 2012, with annualupdates thereafter, and the Firm is in the process ofdeveloping its resolution plans.

• Debit interchange. On October 1, 2011, the FederalReserve adopted final rules implementing the “DurbinAmendment” provisions of the DoddFrank Act, whichlimit the amount the Firm can charge for each debitcard transaction it processes.

• Derivatives. Under the DoddFrank Act, the Firm willbe subject to comprehensive regulation of itsderivatives business, including capital and marginrequirements, central clearing of standardized overthecounter derivatives and the requirement that theybe traded on regulated trading platforms, andheightened supervision. Further, the proposed marginrules for uncleared swaps may apply extraterritoriallyto U.S. firms doing business with clients outside ofthe United States. The DoddFrank Act also requiresbanking entities, such as JPMorgan Chase, tosignificantly restructure their derivatives businesses,including changing the legal entities through whichcertain transactions are conducted.

• Volcker Rule. The Firm will also be affected by therequirements of Section 619 of the DoddFrank Act,and specifically the provisions prohibiting proprietarytrading and restricting the activities involving privateequity and hedge funds (the “Volcker Rule”). OnOctober 11, 2011, regulators proposed the remainingrules to implement the Volcker Rule, which are

in prices or for realizing arbitrage profits for the Firm’sown account. The proposed rule’s definition ofproprietary trading does not include client marketmaking, or certain risk management activities. TheFirm ceased some proprietary trading activities during2010, and is planning to cease its remainingproprietary trading activities within the timeframemandated by the Volcker Rule.

• Capital. The treatment of trust preferred securities asTier 1 capital for regulatory capital purposes will bephased out over a three year period, beginning in 2013.In addition, in June 2011, the Basel Committee andthe Financial Stability Board (“FSB”) announced thatcertain global systemically important banks (“GSIBs”)would be required to maintain additional capital, abovethe Basel III Tier 1 common equity minimum, inamounts ranging from 1% to 2.5%, depending uponthe bank’s systemic importance. In December 2011,the Federal Reserve, the Office of the Comptroller ofthe Currency (“OCC”) and FDIC issued a notice ofproposed rulemaking for implementing ratingsalternatives for the computation of riskbased capitalfor market risk exposures, which, if implemented,would result in significantly higher capital requirementsfor many securitization exposures. For moreinformation, see “Capital requirements” on pages 4–5.

• FDIC Deposit Insurance Fund Assessments. InFebruary 2011, the FDIC issued a final rule changingthe assessment base and the method for calculatingthe deposit insurance assessment rate. Thesechanges became effective on April 1, 2011, andresulted in an aggregate annualized increase ofapproximately $600 million in the assessments thatthe Firm’s bank subsidiaries pay to the FDIC. Formore information, see “Deposit insurance” on page 5.

• Bureau of Consumer Financial Protection. The DoddFrank Act established a new regulatory agency, theBureau of Consumer Financial Protection (“CFPB”).The CFPB has authority to regulate providers of credit,payment and other consumer financial products andservices. The CFPB has examination authority overlarge banks, such as JPMorgan Chase Bank, N.A.and Chase Bank USA, N.A., with respect to thebanks’ consumer financial products and services.

• Heightened prudential standards for systemicallyimportant financial institutions. The DoddFrank Actcreates a structure to regulate systemically importantfinancial companies, and subjects them to heightenedprudential standards. For more information, see“Systemically important financial institutions” below.

• Concentration limits. The DoddFrank Act restrictsacquisitions by financial companies if, as a result ofthe acquisition, the total liabilities of the financialcompany would exceed 10% of the total liabilities ofall financial companies. The Federal Reserve is

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rules to implement the Volcker Rule, which areexpected to be finalized sometime in 2012. Under theproposed rules, “proprietary trading” is defined as thetrading of securities, derivatives, or futures (or optionson any of the foregoing) that is predominantly for thepurpose of shortterm resale, benefiting from shortterm movements

all financial companies. The Federal Reserve isexpected to issue rules related to this restriction in2012.

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The DoddFrank Act instructs U.S. federal banking andother regulatory agencies to conduct approximately 285rulemakings and 130 studies and reports. Theseregulatory agencies include the Commodity FuturesTrading Commission (the “CFTC”); the SEC; the FederalReserve; the OCC; the FDIC; the CFPB; and theFSOC.Other proposals have been made internationally,including additional capital and liquidity requirements thatwill apply to nonU.S. subsidiaries of JPMorgan Chase,such as J.P. Morgan Securities Ltd.Systemically important financial institutions: TheDoddFrank Act creates a structure to regulatesystemically important financial institutions, andsubjects them to heightened prudential standards,including heightened capital, leverage, liquidity, riskmanagement, resolution plan, concentration limit, creditexposure reporting, and early remediation requirements.Systemically important financial institutions will besupervised by the Federal Reserve . Bank holdingcompanies with over $50 billion in assets, includingJPMorgan Chase, and certain nonbank financialcompanies that are designated by the FSOC will beconsidered systemically important financial institutionssubject to the heightened standards and supervision.In addition, if the regulators determine that the size orscope of activities of the company pose a threat to thesafety and soundness of the company or the financialstability of the United States, the regulators have thepower to require such companies to sell or transferassets and terminate activities.On December 20, 2011, the Federal Reserve issuedproposed rules to implement these heightened prudentialstandards. For more information, see “Capitalrequirements” and “Prompt corrective action and earlyremediation” on page 5.Permissible business activities: JPMorgan Chaseelected to become a financial holding company as ofMarch 13, 2000, pursuant to the provisions of theGrammLeachBliley Act. If a financial holding companyor any depository institution controlled by a financialholding company ceases to meet certain capital ormanagement standards, the Federal Reserve mayimpose corrective capital and/or managerialrequirements on the financial holding company and placelimitations on its ability to conduct the broader financialactivities permissible for financial holding companies. Inaddition, the Federal Reserve may require divestiture ofthe holding company’s depository institutions if thedeficiencies persist. Federal regulations also provide thatif any depository institution controlled by a financialholding company fails to maintain a satisfactory ratingunder the Community Reinvestment Act, the FederalReserve must prohibit the financial holding company andits subsidiaries from engaging in any additional activities

activities permitted under the GrammLeachBliley Act.The Federal Reserve has proposed rules under whichthe Federal Reserve could impose restrictions onsystemically important financial institutions that areexperiencing financial weakness, which restrictionscould include limits on acquisitions, among other things.For more information on the restrictions, see “Promptcorrective action and early remediation” on page 5.Financial holding companies and bank holdingcompanies are required to obtain the approval of theFederal Reserve before they may acquire more than fivepercent of the voting shares of an unaffiliated bank.Pursuant to the RiegleNeal Interstate Banking andBranching Efficiency Act of 1994 (the “RiegleNeal Act”),the Federal Reserve may approve an application forsuch an acquisition without regard to whether thetransaction is prohibited under the law of any state,provided that the acquiring bank holding company,before or after the acquisition, does not control morethan 10% of the total amount of deposits of insureddepository institutions in the U.S. or more than 30% (orsuch greater or lesser amounts as permitted under statelaw) of the total deposits of insured depositoryinstitutions in the state in which the acquired bank hasits home office or a branch. In addition, the DoddFrankAct restricts acquisitions by financial companies if, as aresult of the acquisition, the total liabilities of thefinancial company would exceed 10% of the totalliabilities of all financial companies. For nonU.S.financial companies, liabilities are calculated using onlythe riskweighted assets of their U.S. operations. U.S.financial companies must include all of their riskweighted assets (including assets held overseas). Thiscould have the effect of allowing a nonU.S. financialcompany to grow to hold significantly more than 10% ofthe U.S. market without exceeding the concentrationlimit. Under the DoddFrank Act, the Firm must providewritten notice to the Federal Reserve prior to acquiringdirect or indirect ownership or control of any votingshares of any company with over $10 billion in assetsthat is engaged in “financial in nature” activities.Regulation by Federal Reserve: The Federal Reserveacts as an “umbrella regulator” and certain of JPMorganChase’s subsidiaries are regulated directly by additionalauthorities based on the particular activities of thosesubsidiaries. For example, JPMorgan Chase Bank,N.A., and Chase Bank USA, N.A., are regulated by theOCC. See “Other supervision and regulation” on pages6–7 for a further description of the regulatory supervisionto which the Firm’s subsidiaries are subject.Dividend restrictions: Federal law imposes limitationson the payment of dividends by national banks.Dividends payable by JPMorgan Chase Bank, N.A. andChase Bank USA, N.A., as national bank subsidiaries ofJPMorgan Chase, are limited to the lesser of the

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its subsidiaries from engaging in any additional activitiesother than those permissible for bank holding companiesthat are not financial holding companies. So long as thedepositoryinstitution subsidiaries of JPMorgan Chasemeet the capital, management and CommunityReinvestment Act requirements, the Firm is permitted toconduct the broader

JPMorgan Chase, are limited to the lesser of theamounts calculated under a “recent earnings” test and an“undivided profits” test. Under the recent earnings test, adividend may not be paid if the total of all dividendsdeclared by a bank in any calendar year is in excess ofthe current year’s net income

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combined with the retained net income of the twopreceding years, unless the national bank obtains theapproval of the OCC. Under the undivided profits test, adividend may not be paid in excess of a bank’s“undivided profits.” See Note 27 on page 281 for theamount of dividends that the Firm’s principal banksubsidiaries could pay, at January 1, 2012, to theirrespective bank holding companies without the approvalof their banking regulators.In addition to the dividend restrictions described above,the OCC, the Federal Reserve and the FDIC haveauthority to prohibit or limit the payment of dividends bythe banking organizations they supervise, includingJPMorgan Chase and its bank and bank holdingcompany subsidiaries, if, in the banking regulator’sopinion, payment of a dividend would constitute anunsafe or unsound practice in light of the financialcondition of the banking organization.Moreover, the Federal Reserve has issued rulesrequiring bank holding companies, such as JPMorganChase, to submit to the Federal Reserve a capital planon an annual basis and receive a notice of nonobjectionfrom the Federal Reserve before taking capital actions,such as paying dividends, implementing common equityrepurchase programs or redeeming or repurchasingcapital instruments. The rules establish a supervisorycapital assessment program that outlines FederalReserve expectations concerning the processes thatsuch bank holding companies should have in place toensure they hold adequate capital and maintain readyaccess to funding under adverse conditions. The capitalplan must demonstrate, among other things, how thebank holding company will maintain a pro forma Basel ITier 1 common ratio above 5% under a supervisorystress scenario.Capital requirements: Federal banking regulators haveadopted riskbased capital and leverage guidelines thatrequire the Firm’s capitaltoassets ratios to meet certainminimum standards.The riskbased capital ratio is determined by allocatingassets and specified offbalance sheet financialinstruments into riskweighted categories, with higherlevels of capital being required for the categoriesperceived as representing greater risk. Under theguidelines, capital is divided into two tiers: Tier 1 capitaland Tier 2 capital. The amount of Tier 2 capital may notexceed the amount of Tier 1 capital. Total capital is thesum of Tier 1 capital and Tier 2 capital. Under theguidelines, banking organizations are required tomaintain a total capital ratio (total capital to riskweighted assets) of 8% and a Tier 1 capital ratio of 4%.For a further description of these guidelines, see Note 28on pages 281–283.The federal banking regulators also have establishedminimum leverage ratio guidelines. The leverage ratio is

ratio of 4%. Bank holding companies may be expectedto maintain ratios well above the minimum levels,depending upon their particular condition, risk profile andgrowth plans. The minimum riskbased capitalrequirements adopted by the federal banking agenciesfollow the Capital Accord of the Basel Committee onBanking Supervision (“Basel I”). In 2004, the BaselCommittee published a revision to the Accord (“BaselII”). The goal of the Basel II Framework is to providemore risksensitive regulatory capital calculations andpromote enhanced risk management practices amonglarge, internationally active banking operations. InDecember 2010, the Basel Committee finalized furtherrevisions to the Accord (“Basel III”) which narrowed thedefinition of capital, increased capital requirements forspecific exposures, introduced shortterm liquiditycoverage and term funding standards, and establishedan international leverage ratio. In June 2011, the U.S.federal banking agencies issued rules to establish apermanent Basel I floor under Basel II/Basel IIIcalculations. For further description of these capitalrequirements, see pages 119–122.In connection with the U.S. Government’s SupervisoryCapital Assessment Program in 2009, U.S. bankingregulators developed a new measure of capital, Tier 1common, which is defined as Tier 1 capital lesselements of Tier 1 capital not in the form of commonequity such as perpetual preferred stock, noncontrollinginterests in subsidiaries and trust preferred capital debtsecurities. Tier 1 common, a nonGAAP financialmeasure, is used by banking regulators, investors andanalysts to assess and compare the quality andcomposition of the Firm’s capital with the capital of otherfinancial services companies. The Firm uses Tier 1common along with the other capital measures toassess and monitor its capital position. For moreinformation, see Regulatory capital on pages 119–122.In June 2011, the Basel Committee and the FSBannounced that GSIBs would be required to maintainadditional capital, above the Basel III Tier 1 commonequity minimum, in amounts ranging from 1% to 2.5%,depending upon the bank’s systemic importance.Furthermore, in order to provide a disincentive for banksfacing the highest required level of Tier 1 common equityto “increase materially their global systemic importancein the future,” an additional 1% charge could be applied.The Basel III revisions governing the capitalrequirements are subject to prolonged observation andtransition periods. The transition period for banks tomeet the revised Tier 1 common equity requirement willbegin in 2013, with implementation on January 1, 2019.The additional capital requirements for GSIBs will bephasedin starting January 1, 2016, with fullimplementation on January 1, 2019. The Firm willcontinue to monitor the ongoing rulemaking process toassess both the timing and the impact of Basel III on its

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minimum leverage ratio guidelines. The leverage ratio isdefined as Tier 1 capital divided by adjusted averagetotal assets. The minimum leverage ratio is 3% for bankholding companies that are considered “strong” underFederal Reserve guidelines or which have implementedthe Federal Reserve’s riskbased capital measure formarket risk. Other bank holding companies must have aminimum leverage

assess both the timing and the impact of Basel III on itsbusinesses and financial condition.In addition to capital requirements, the Basel Committeehas also proposed two new measures of liquidity risk:the

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“Liquidity Coverage Ratio” and the “Net Stable FundingRatio,” which are intended to measure, over differenttime spans, the amount of liquid assets held by theFirm. The observation periods for both these standardsbegan in 2011, with implementation in 2015 and 2018,respectively.The DoddFrank Act prohibits the use of external creditratings in federal regulations. In December 2011, theFederal Reserve, OCC and FDIC issued a notice ofproposed rulemaking for implementing ratingsalternatives for the computation of riskbased capital formarket risk exposures. The proposal, if implemented ascurrently proposed, would result in significantly highercapital requirements for many securitization exposures.The Firm anticipates that the U.S. banking agencies willapply a parallel capital treatment to securitizations inboth the trading and banking books.Effective January 1, 2008, the SEC authorized J.P.Morgan Securities LLC to use the alternative method ofcomputing net capital for broker/dealers that are part ofConsolidated Supervised Entities as defined by SECrules. Accordingly, J.P. Morgan Securities LLC maycalculate deductions for market risk using its internalmarket risk models.For additional information regarding the Firm’s regulatorycapital, see Regulatory capital on pages 119–122.Prompt corrective action and early remediation: TheFederal Deposit Insurance Corporation Improvement Actof 1991 requires the relevant federal banking regulator totake “prompt corrective action” with respect to adepository institution if that institution does not meetcertain capital adequacy standards. The regulationsapply only to banks and not to bank holding companies,such as JPMorgan Chase. However, the FederalReserve is authorized to take appropriate action againstthe bank holding company based on the undercapitalizedstatus of any bank subsidiary. In certain instances, thebank holding company would be required to guaranteethe performance of the capital restoration plan for itsundercapitalized subsidiary.In addition, under the DoddFrank Act, the FederalReserve is required to issue rules which would providefor early remediation of systemically important financialcompanies, such as JPMorgan Chase. In December2011, the Federal Reserve issued proposed rules toimplement these early remediation requirements onsystemically important financial institutions thatexperience financial weakness. These proposedrestrictions could include limits on capital distributions,acquisitions, and requirements to raise additional capital.Deposit Insurance: The FDIC deposit insurance fundprovides insurance coverage for certain deposits, whichinsurance is funded through assessments on banks,such as JPMorgan Chase Bank, N.A. and Chase BankUSA, N.A. Higher levels of bank failures over the past

coverage for noninterest bearing demand deposits isunlimited. In light of the increased stress on the depositinsurance fund caused by these developments, and inorder to maintain a strong funding position and restorethe reserve ratios of the deposit insurance fund, theFDIC imposed a special assessment in June 2009, hasincreased assessment rates of insured institutionsgenerally, and required insured institutions to prepay onDecember 30, 2009, the premiums that were expectedto become due over the following three years.As required by the DoddFrank Act, the FDIC issued afinal rule in February 2011 that changes the assessmentbase from insured deposits to average consolidated totalassets less average tangible equity, and changes theassessment rate calculation. These changes resulted inan aggregate annualized increase of approximately $600million in the assessments that the Firm’s banksubsidiaries pay to the FDIC.Powers of the FDIC upon insolvency of an insureddepository institution or the Firm: Upon theinsolvency of an insured depository institution, the FDICwill be appointed the conservator or receiver under theFederal Deposit Insurance Act. In such an insolvency,the FDIC has the power:• to transfer any assets and liabilities to a new obligorwithout the approval of the institution’s creditors;

• to enforce the terms of the institution’s contractspursuant to their terms; or

• to repudiate or disaffirm any contract or lease to whichthe institution is a party.

The above provisions would be applicable to obligationsand liabilities of JPMorgan Chase’s subsidiaries that areinsured depository institutions, such as JPMorganChase Bank, N.A., and Chase Bank USA, N.A.,including, without limitation, obligations under senior orsubordinated debt issued by those banks to investors(referred to below as “public noteholders”) in the publicmarkets.Under federal law, the claims of a receiver of an insureddepository institution for administrative expense and theclaims of holders of U.S. deposit liabilities (including theFDIC) have priority over the claims of other unsecuredcreditors of the institution, including public noteholdersand depositors in nonU.S. offices.An FDICinsured depository institution can be held liablefor any loss incurred or expected to be incurred by theFDIC in connection with another FDICinsured institutionunder common control with such institution being “indefault” or “in danger of default” (commonly referred to as“crossguarantee” liability). An FDIC crossguaranteeclaim against a depository institution is generallysuperior in right of payment to claims of the holdingcompany and its affiliates against such depositoryinstitution.

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USA, N.A. Higher levels of bank failures over the pastfew years have dramatically increased resolution costsof the FDIC and depleted the deposit insurance fund. Inaddition, the amount of FDIC insurance coverage forinsured deposits has been increased generally from$100,000 per depositor to $250,000 per depositor, anduntil January 1, 2013, the

institution.Under the DoddFrank Act, where a systemicallyimportant financial institution, such as JPMorgan Chase,is in default or danger of default, the FDIC may beappointed receiver in order to conduct an orderlyliquidation of such systemically

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important financial institution. The FDIC has issuedrules to implement its orderly liquidation authority, and isexpected to propose additional rules. The FDIC haspowers as receiver similar to those described above.However, the details of certain powers will be thesubject of additional rulemakings and have not yet beenfully delineated.The Bank Secrecy Act: The Bank Secrecy Act (“BSA”)requires all financial institutions, including banks andsecurities brokerdealers, to, among other things,establish a riskbased system of internal controlsreasonably designed to prevent money laundering andthe financing of terrorism. The BSA includes a variety ofrecordkeeping and reporting requirements (such as cashand suspicious activity reporting), as well as duediligence/knowyourcustomer documentationrequirements. The Firm has established a global antimoney laundering program in order to comply with BSArequirements.Holding company as source of strength for banksubsidiaries: Under current Federal Reserve policy,JPMorgan Chase is expected to act as a source offinancial strength to its bank subsidiaries and to commitresources to support these subsidiaries incircumstances where it might not do so absent suchpolicy. Effective July 2011, provisions of the DoddFrankAct codified the Federal Reserve’s policy that require abank holding company to serve as a source of strengthfor any depository institution subsidiary. However,because the GrammLeachBliley Act provides forfunctional regulation of financial holding companyactivities by various regulators, the GrammLeachBlileyAct prohibits the Federal Reserve from requiringpayment by a holding company or subsidiary to adepository institution if the functional regulator of thepayor objects to such payment. In such a case, theFederal Reserve could instead require the divestiture ofthe depository institution and impose operatingrestrictions pending the divestiture.Restrictions on transactions with affiliates: The banksubsidiaries of JPMorgan Chase are subject to certainrestrictions imposed by federal law on extensions ofcredit to, and certain other transactions with, the Firmand certain other affiliates, and on investments in stockor securities of JPMorgan Chase and those affiliates.These restrictions prevent JPMorgan Chase and otheraffiliates from borrowing from a bank subsidiary unlessthe loans are secured in specified amounts and aresubject to certain other limits. For more information, seeNote 27 on page 281. Effective in 2012, the DoddFrankAct extends such restrictions to derivatives andsecurities lending transactions. In addition, the DoddFrank Act’s Volcker Rule imposes similar restrictions ontransactions between banking entities, such asJPMorgan Chase and its subsidiaries, and hedge fundsor private equity funds for which the banking entity

regulators” under the GrammLeachBliley Act).JPMorgan Chase’s national bank subsidiaries, such asJPMorgan Chase Bank, N.A., and Chase Bank USA,N.A., are subject to supervision and regulation by theOCC and, in certain matters, by the Federal Reserveand the FDIC. Supervision and regulation by theresponsible regulatory agency generally includescomprehensive annual reviews of all major aspects ofthe relevant bank’s business and condition, andimposition of periodic reporting requirements andlimitations on investments, among other powers.The Firm conducts securities underwriting, dealing andbrokerage activities in the United States through J.P.Morgan Securities LLC and other brokerdealersubsidiaries, all of which are subject to regulations of theSEC, the Financial Industry Regulatory Authority andthe New York Stock Exchange, among others. The Firmconducts similar securities activities outside the UnitedStates subject to local regulatory requirements. In theUnited Kingdom, those activities are conducted by J.P.Morgan Securities Ltd., which is regulated by the U.K.Financial Services Authority. The operations ofJPMorgan Chase mutual funds also are subject toregulation by the SEC.The Firm has subsidiaries that are members of futuresexchanges in the United States and abroad and areregistered accordingly.In the United States, two subsidiaries are registered asfutures commission merchants, and other subsidiariesare either registered with the CFTC as commodity pooloperators and commodity trading advisors or exemptfrom such registration. These CFTCregisteredsubsidiaries are also members of the National FuturesAssociation. The Firm’s U.S. energy business is subjectto regulation by the Federal Energy RegulatoryCommission. It is also subject to other extensive andevolving energy, commodities, environmental and othergovernmental regulation both in the U.S. and otherjurisdictions globally.Under the DoddFrank Act, the CFTC and SEC will bethe regulators of the Firm’s derivatives businesses. TheFirm expects that JPMorgan Chase Bank, N.A. and J.P.Morgan Securities LLC will register with the CFTC asswap dealers and with the SEC as securitybased swapdealers, and that J.P. Morgan Ventures EnergyCorporation will register with the CFTC as a swapdealer.The types of activities in which the nonU.S. branchesof JPMorgan Chase Bank, N.A. and the internationalsubsidiaries of JPMorgan Chase may engage aresubject to various restrictions imposed by the FederalReserve. Those nonU.S. branches and internationalsubsidiaries also are subject to the laws and regulatoryauthorities of the countries in which they operate.The activities of JPMorgan Chase Bank, N.A. and

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or private equity funds for which the banking entityserves as the investment manager, investment advisoror sponsor.Other supervision and regulation: The Firm’s banksand certain of its nonbank subsidiaries are subject todirect supervision and regulation by various other federaland state authorities (some of which are considered“functional

The activities of JPMorgan Chase Bank, N.A. andChase Bank USA, N.A. as consumer lenders also aresubject to regulation under various U.S. federal laws,including the TruthinLending, Equal Credit Opportunity,Fair Credit Reporting, Fair Debt Collection Practice,Electronic Funds Transfer and CARD acts, as well asvarious state laws. These statutes impose requirementson consumer loan origination

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and collection practices. Under the DoddFrank Act, theCFPB will be responsible for rulemaking andenforcement pursuant to such statutes.Under the requirements imposed by the GrammLeachBliley Act, JPMorgan Chase and its subsidiaries arerequired periodically to disclose to their retail customersthe Firm’s policies and practices with respect to thesharing of nonpublic customer information withJPMorgan Chase affiliates and others, and theconfidentiality and security of that information. Under theGrammLeachBliley Act, retail customers also must begiven the opportunity to “opt out” of informationsharingarrangements with nonaffiliates, subject to certainexceptions set forth in the GrammLeachBliley Act.

Item 1A: RISK FACTORS

The following discussion sets forth the material riskfactors that could affect JPMorgan Chase’s financialcondition and operations. Readers should not considerany descriptions of such factors to be a complete set ofall potential risks that could affect the Firm.

Regulatory Risk

JPMorgan Chase operates within a highly regulatedindustry, and the Firm’s businesses and results aresignificantly affected by the laws and regulations towhich it is subject.As a global financial services firm, JPMorgan Chase issubject to extensive and comprehensive regulation understate and federal laws in the United States and the lawsof the various jurisdictions outside the United States inwhich the Firm does business. These laws andregulations significantly affect the way that the Firmdoes business, and can restrict the scope of its existingbusinesses and limit its ability to expand its productofferings or to pursue acquisitions, or can make itsproducts and services more expensive for clients andcustomers.The full impact of the DoddFrank Act on the Firm’sbusinesses, operations and earnings remainsuncertain because of the extensive rulemaking stillto be completed.The DoddFrank Act, enacted in 2010, significantlyincreases the regulation of the financial servicesindustry. For further information, see Supervision andregulation on pages 1–7.The U.S. Department of the Treasury, the FSOC, theSEC, the CFTC, the Federal Reserve, the OCC, theCFPB and the FDIC are engaged in extensive rulemaking mandated by the DoddFrank Act, and much ofthe rulemaking remains to be done. As a result, thecomplete impact of the DoddFrank Act on the Firmremains uncertain. Certain aspects of the DoddFrankAct and such rulemaking are discussed in more detailbelow.

take to mitigate this anticipated reduction in net income,it is unlikely that any such actions would wholly offsetsuch reduction.Volcker Rule. Until the final regulations under theVolcker Rule are adopted, the precise definition ofprohibited “proprietary trading”, the scope of anyexceptions for market making and hedging, and thescope of permitted hedge fund and private equity fundactivities remains uncertain. It is unclear under theproposed rules whether some portion of the Firm’smarketmaking and risk mitigation activities, as currentlyconducted, will be required to be curtailed or will beotherwise adversely affected. In addition, the rules, ifenacted as proposed, would prohibit certainsecuritization structures and would bar U.S. bankingentities from sponsoring or investing in certain nonU.S.funds. Also, with respect to certain of the Firm’sinvestments in illiquid private equity funds, shouldregulators not exercise their authority to permit the Firmto hold such investments beyond the minimum statutorydivestment period, the Firm could incur substantiallosses when it disposes of such investments, as it maybe forced to sell such investments at a substantialdiscount in the secondary market as a result of both theconstrained timing of such sales and the possibility thatother financial institutions are likewise liquidating theirinvestments at the same time.Derivatives. In addition to imposing comprehensiveregulation on the Firm’s derivatives businesses, theDoddFrank Act also requires banking entities, such asJPMorgan Chase, to significantly restructure theirderivatives businesses, including changing the legalentities through which such businesses are conducted.Further, the proposed margin rules for uncleared swapsmay apply extraterritorially to U.S. firms doing businesswith clients outside of the United States. Clients of nonU.S. firms doing business outside the United Stateswould not be required to post margin in similartransactions. If these margin rules become final ascurrently drafted, JPMorgan Chase could be at asignificant competitive disadvantage to its nonU.S.competitors, which could have a material adverse effecton the earnings and profitability of the Firm’s wholesalebusinesses.Heightened prudential standards for systemicallyimportant financial institutions. Under the DoddFrankAct, JPMorgan Chase is considered a systemicallyimportant financial institution and is subject to theheightened standards and supervision prescribed by theAct. If the proposed rules that were issued on December20, 2011 are adopted as currently proposed, they arelikely to increase the Firm’s operational, compliance andrisk management costs, and could have an adverseeffect on the Firm’s business, results of operations orfinancial condition.

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below.Debit interchange. The Firm believes that, as a result ofthe Durbin Amendment, its annualized net income maybe reduced by approximately $600 million per year.Although the Firm continues to consider various actionsthat it may

CFPB. Although the Firm is unable to predict whatspecific measures the CFPB may take in applying itsregulatory mandate, any new regulatory requirements orchanges to existing requirements that the CFPB maypromulgate could require changes in JPMorgan Chase’sconsumer businesses

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Part I

and result in increased compliance costs and impair theprofitability of such businesses. In addition, as a resultof the DoddFrank Act’s potential expansion of theauthority of state attorneys general to bring actions toenforce federal consumer protection legislation, the Firmcould potentially be subject to additional state lawsuitsand enforcement actions, thereby further increasing itslegal and compliance costs.Resolution and Recovery. The FDIC and the FederalReserve have issued a final rule that will require theFirm to submit periodically to the Federal Reserve, theFDIC and the FSOC a resolution plan under theBankruptcy Code in the event of material financialdistress or failure (a “resolution plan”). In 2012, the FDICalso issued a final rule that will require the Firm tosubmit periodic contingency plans to the FDIC under theFederal Deposit Insurance Act outlining its resolutionplan in the event of its failure. The Firm’s initialresolution plan submissions are due on July 1, 2012,with annual updates thereafter, and the Firm is in theprocess of developing its resolution plans. If the FDICand the Federal Reserve determine that the Firm’sresolution plan is not credible or would not facilitate anorderly resolution under the Bankruptcy Code, the FDICand the Federal Reserve may jointly impose morestringent capital, leverage or liquidity requirements, orrestrictions on the growth, activities or operations of theFirm, or require the Firm to restructure, reorganize ordivest certain assets or operations in order to facilitatean orderly resolution. Any such measures, particularlythose aimed at the disaggregation of the Firm, mayincrease the Firm’s systems, technology and managerialcosts, reduce the Firm’s capital, lessen efficiencies andeconomies of scale and potentially impede the Firm’sbusiness strategies.Elimination of Use of External Credit Ratings. InDecember 2011, the Federal Reserve, the OCC and theFDIC issued proposed rules for riskbased capitalguidelines which would eliminate the use of externalcredit ratings for the calculation of riskweighted assets.If the rules become final as currently proposed, theywould result in a significant increase in the calculation ofthe Firm’s riskweighted assets, which could require theFirm to hold more capital, increase its cost of doingbusiness and place the Firm at a competitivedisadvantage to nonU.S. competitors.Concentration Limits. The DoddFrank Act restrictsacquisitions by financial companies if, as a result of theacquisition, the total liabilities of the financial companywould exceed 10% of the total liabilities of all financialcompanies. The Federal Reserve is expected to issuerules related to these provisions of the DoddFrank Actin 2012. This concentration limit could restrict the Firm’sability to make acquisitions in the future, therebyadversely affecting its growth prospects.

and regulations will affect the businesses and operationsof the Firm. Additional legislative or regulatory actions inthe United States, the EU or in other countries couldresult in a significant loss of revenue for the Firm, limitthe Firm’s ability to pursue business opportunities inwhich it might otherwise consider engaging, affect thevalue of assets that the Firm holds, require the Firm toincrease its prices and therefore reduce demand for itsproducts, impose additional costs on the Firm, orotherwise adversely affect the Firm’s businesses.Accordingly, any such new or additional legislation orregulations could have an adverse effect on the Firm’sbusiness, results of operations or financial condition.The Basel III capital standards will impose additionalcapital, liquidity and other requirements on the Firmthat could decrease its competitiveness andprofitability.The Basel Committee on Banking Supervision (the“Basel Committee”) announced in December 2010revisions to its Capital Accord (commonly referred to as“Basel III”), which will require higher capital ratiorequirements for banks, narrow the definition of capital,expand the definition of riskweighted assets, andintroduce shortterm liquidity and term funding standards,among other things.

Capital Surcharge. In June 2011, the Basel Committeeand the FSB proposed that GSIBs be required tomaintain additional capital above the Basel III Tier 1common equity minimum. See page 2 in Item 1:Business for further information on the proposed capitalchange. Based on the Firm’s current understanding ofthese new capital requirements, the Firm expects that itwill be in compliance with all of the standards to which itwill be subject as they become effective. However,compliance with these capital standards may adverselyaffect the Firm’s operational costs, reduce its return onequity, or cause the Firm to alter the types of products itoffers to its customers and clients, thereby causing theFirm’s products to become less attractive or placing theFirm at a competitive disadvantage to financialinstitutions, both within and outside the United States,that are not subject to the same capital surcharge.

Liquidity Coverage and Net Stable Funding Ratios. TheBasel Committee has also proposed two new measuresof liquidity risk: the “liquidity coverage ratio” and the “netstable funding ratio,” which are intended to measure,over different time spans, the amount of the liquidassets held by the Firm. If the ratios are finalized ascurrently proposed, the Firm may need, in order to be incompliance with such ratios, to incur additional costs toraise liquidity from sources that are more expensive thanits current funding sources and may need to take certainmitigating actions, such as ceasing to offer certainproducts to its customers and clients or charging higherfees for extending certain lines of credit. Accordingly,

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The total impact of the DoddFrank Act cannot be fullyassessed without taking into consideration how nonU.S. policymakers and regulators will respond to theDoddFrank Act and the implementing regulations underthe Act, and how the cumulative effects of both U.S.and nonU.S. laws

fees for extending certain lines of credit. Accordingly,compliance with these liquidity coverage standardscould adversely affect the Firm’s funding costs or reduceits profitability in the future.

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NonU.S. regulations and initiatives may beinconsistent or may conflict with current orproposed regulations in the United States, whichcould create increased compliance and other costsand adversely affect the Firm’s businesses,operations or financial conditions.The EU has created a European Systemic Risk Board tomonitor financial stability, and the Group of TwentyFinance Ministers and Central Bank Governors (“G20”)broadened the membership and scope of the FinancialStability Forum in 2008 to form the FSB. Theseinstitutions, which are charged with developing ways topromote crossborder financial stability, are consideringvarious proposals to address risks associated withglobal financial institutions. Some of the initiativesadopted include increased capital requirements forcertain trading instruments or exposures andcompensation limits on certain employees located inaffected countries. In the U.K., regulators haveincreased liquidity requirements for local financialinstitutions, including regulated U.K. subsidiaries of nonU.K. bank holding companies and branches of nonU.K.banks located in the U.K.; adopted a Bank Tax Levythat applies to balance sheets of branches andsubsidiaries of nonU.K. banks; and proposed thecreation of resolution and recovery plans by U.K.regulated entities, among other initiatives.The regulatory schemes and requirements that are beingproposed by various regulators around the world may beinconsistent or conflict with regulations to which theFirm is subject in the United States (as well as in otherparts of the world), thereby subjecting the Firm to highercompliance and legal costs, as well as the possibility ofhigher operational, capital and liquidity costs, all ofwhich could have an adverse effect on the Firm’sbusiness, results of operations and profitability in thefuture.Expanded regulatory oversight of JPMorgan Chase’sconsumer businesses will increase the Firm’scompliance costs and risks and may negativelyaffect the profitability of such businesses.JPMorgan Chase’s consumer businesses are subject toincreasing regulatory oversight and scrutiny with respectto its compliance under consumer laws and regulations,including changes implemented as a part of the DoddFrank Act. The Firm has entered into Consent Orderswith banking regulators relating to its residentialmortgage servicing, foreclosure and lossmitigationactivities. The Consent Orders require significantchanges to the Firm’s servicing and default business;the submission and implementation of a comprehensiveaction plan setting forth the steps necessary to ensurethe Firm’s residential mortgage servicing, foreclosureand lossmitigation activities are conducted inaccordance with the requirements of the ConsentOrders; and other remedial actions that the Firm has

mortgages. This global settlement requires the Firm tomake cash payments and provide certain refinancingand other borrower relief, as well as to adhere to certainenhanced mortgage servicing standards. For furtherinformation, see “Subsequent events” in Note 2 on page184, and Mortgage Foreclosure Investigations andLitigation in Note 31 on pages 295–296.In addition, any new regulatory requirements or changesto existing requirements that the CFPB may promulgatecould require changes in the product offerings andpractices of JPMorgan Chase’s consumer businesses,result in increased compliance costs and affect theprofitability of such businesses.Finally, as a result of increasing federal and statescrutiny ofthe Firm’s consumer practices, the Firm may face agreaternumber or wider scope of investigations, enforcementactionsand litigation in the future, thereby increasing its costsassociated with responding to or defending such actions.Inaddition, increased regulatory inquiries andinvestigations, aswell as any additional legislative or regulatorydevelopmentsaffecting the Firm’s consumer businesses, and anyrequiredchanges to the Firm’s business operations resulting fromthese developments, could result in significant loss ofrevenue, limit the products or services the Firm offers,requirethe Firm to increase its prices and therefore reducedemandfor its products, impose additional compliance costs ontheFirm, cause harm to the Firm’s reputation or otherwiseadversely affect the Firm’s consumer businesses. Inaddition,if the Firm does not appropriately comply with current orfuture legislation and regulations that apply to itsconsumeroperations, the Firm may be subject to fines, penaltiesorjudgments, or material regulatory restrictions on itsbusinesses, which could adversely affect the Firm’soperationsand, in turn, its financial results.Market RiskJPMorgan Chase’s results of operations have been,and may continue to be, adversely affected by U.S.and international financial market and economicconditions.JPMorgan Chase’s businesses are materially affectedby economic and market conditions, including the

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Orders; and other remedial actions that the Firm hasundertaken to ensure that it satisfies all requirements ofthe Consent Orders. The Firm also agreed in February2012 to a settlement in principle with a number of federaland state government agencies, including the U.S.Department of Justice, the U.S. Department of Housingand Urban Development, the CFPB and the StateAttorneys General, relating to the servicing andorigination of

liquidity of the global financial markets; the level andvolatility of debt and equity prices, interest rates andcurrency and commodities prices; investor sentiment;events that reduce confidence in the financial markets;inflation and unemployment; the availability and cost ofcapital and credit; the occurrence of natural disasters,acts of war or terrorism; and the health of U.S. orinternational economies.In the Firm’s wholesale businesses, the abovementioned factors can affect transactions involving theFirm’s underwriting and advisory businesses; therealization of cash returns from its private equitybusiness; the volume of transactions that the Firmexecutes for its customers and, therefore, the revenuethat the Firm receives from commissions and spreads;and the willingness of financial sponsors or otherinvestors to participate in loan syndications orunderwritings managed by the Firm.

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Part I

The Firm generally maintains extensive positions in thefixed income, currency, commodities and equity marketsto facilitate client demand and provide liquidity to clients.From time to time the Firm may have marketmakingpositions that lack pricing transparency or liquidity. Therevenue derived from these positions is affected bymany factors, including the Firm’s success in effectivelyhedging its market and other risks, volatility in interestrates and equity, debt and commodities markets, creditspreads, and availability of liquidity in the capitalmarkets, all of which are affected by economic andmarket conditions. The Firm anticipates that revenuerelating to its marketmaking and private equitybusinesses will continue to experience volatility, whichwill affect pricing or the ability to realize returns fromsuch activities, and that this could materially adverselyaffect the Firm’s earnings.The fees that the Firm earns for managing thirdpartyassets are also dependent upon general economicconditions. For example, a higher level of U.S. or nonU.S. interest rates or a downturn in securities marketscould affect the valuations of the thirdparty assets thatthe Firm manages or holds in custody, which, in turn,could affect the Firm’s revenue. Macroeconomic ormarket concerns may also prompt outflows from theFirm’s funds or accounts.Changes in interest rates will affect the level of assetsand liabilities held on the Firm’s balance sheet and therevenue the Firm earns from net interest income. A lowinterest rate environment or a flat or inverted yield curvemay adversely affect certain of the Firm’s businesses bycompressing net interest margins, reducing the amountsthe Firm earns on its investment securities portfolio, orreducing the value of its mortgage servicing rights(“MSR”) asset, thereby reducing the Firm’s net interestincome and other revenues.The Firm’s consumer businesses are particularlyaffected by domestic economic conditions, includingU.S. interest rates; the rate of unemployment; housingprices; the level of consumer confidence; changes inconsumer spending; and the number of personalbankruptcies. Any further deterioration in currenteconomic conditions, or the failure of the economy torebound in the near term, could diminish demand for theproducts and services of the Firm’s consumerbusinesses, or increase the cost to provide suchproducts and services. In addition, adverse economicconditions, such as continuing declines in home pricesor persistent high levels of unemployment, could lead toan increase in mortgage, credit card and other loandelinquencies and higher net chargeoffs, which canreduce the Firm’s earnings.Widening of credit spreads makes it more expensive forthe Firm to borrow on both a secured and unsecuredbasis. Credit spreads widen or narrow not only in

The outcome of the EU sovereign debt crisis couldhave adverse effects on the Firm’s businesses,operations and earnings.Despite various assistance packages and facilities forGreece, Ireland and Portugal, it is not possible to predicthow markets will react if one or more of these countrieswere to default, and such a default, if it were to occur,could lead to “market contagion” in other Eurozonecountries and thereby adversely affect the market valueof securities and other obligations held by the Firm’s IB,AM, TSS and CIO businesses. In addition, the departureof any Eurozone country from the Euro could lead toserious foreign exchange, operational and settlementdisruptions, which, in turn, may have a negative impacton the Firm’s operations and businesses.

Credit RiskThe financial condition of JPMorgan Chase’scustomers, clients and counterparties, includingother financial institutions, could adversely affect theFirm.If the current economic environment were to deterioratefurther, or not rebound in the near term, more ofJPMorgan Chase’s customers may become delinquenton their loans or other obligations to the Firm which, inturn, could result in a higher level of chargeoffs andprovisions for credit losses, or in requirements that theFirm purchase assets from or provide other funding to itsclients and counterparties, any of which could adverselyaffect the Firm’s financial condition. Moreover, asignificant deterioration in the credit quality of one of theFirm’s counterparties could lead to concerns in themarket about the credit quality of other counterparties inthe same industry, thereby exacerbating the Firm’scredit risk exposure, and increasing the losses (includingmarktomarket losses) that the Firm could incur in itsmarketmaking and clearing businesses.Financial services institutions are interrelated as a resultof marketmaking, trading, clearing, counterparty, orother relationships. The Firm routinely executestransactions with counterparties in the financial servicesindustry, including brokers and dealers, commercialbanks, investment banks, mutual and hedge funds, andother institutional clients. Many of these transactionsexpose the Firm to credit risk in the event of a default bythe counterparty or client. The Firm is a market leader inproviding clearing, custodial and prime brokerageservices for financial services companies. When such aclient of the Firm becomes bankrupt or insolvent, theFirm may become entangled in significant disputes andlitigation with the client’s bankruptcy estate and othercreditors or involved in regulatory investigations, all ofwhich can increase the Firm’s operational and litigationcosts.During periods of market stress or illiquidity, the Firm’scredit risk also may be further increased when the Firm

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basis. Credit spreads widen or narrow not only inresponse to Firmspecific events and circumstances, butalso as a result of general economic and geopoliticalevents and conditions. Changes in the Firm’s creditspreads will impact, positively or negatively, the Firm’searnings on liabilities that are recorded at fair value.

credit risk also may be further increased when the Firmcannot realize the fair value of the collateral held by it orwhen collateral is liquidated at prices that are notsufficient to recover the full amount of the loan,derivative or other exposure due to the Firm. Further,disputes with counterparties as to the valuation ofcollateral significantly

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increase in times of market stress and illiquidity. Periodsof illiquidity, as experienced in 2008 and early 2009, mayoccur again and could produce losses if the Firm isunable to realize the fair value of collateral or managedeclines in the value of collateral.

Concentration of credit and market risk couldincrease the potential for significant losses.JPMorgan Chase has exposure to increased levels ofrisk when customers are engaged in similar businessactivities or activities in the same geographic region, orwhen they have similar economic features that wouldcause their ability to meet contractual obligations to besimilarly affected by changes in economic conditions.As a result, the Firm regularly monitors varioussegments of its portfolio exposures to assess potentialconcentration risks. The Firm’s efforts to diversify orhedge its credit portfolio against concentration risks maynot be successful.

In addition, disruptions in the liquidity or transparency ofthe financial markets may result in the Firm’s inability tosell, syndicate or realize the value of its positions,thereby leading to increased concentrations. The inabilityto reduce the Firm’s positions may not only increase themarket and credit risks associated with such positions,but also increase the level of riskweighted assets onthe Firm’s balance sheet, thereby increasing its capitalrequirements and funding costs, all of which couldadversely affect the operations and profitability of theFirm’s businesses.

Liquidity Risk

If JPMorgan Chase does not effectively manage itsliquidity, its business could suffer.JPMorgan Chase’s liquidity is critical to its ability tooperate its businesses. Some potential conditions thatcould impair the Firm’s liquidity include markets thatbecome illiquid or are otherwise experiencing disruption,unforeseen cash or capital requirements (including,among others, commitments that may be triggered tospecial purpose entities (“SPEs”) or other entities),difficulty in selling or inability to sell assets, unforeseenoutflows of cash or collateral, and lack of market orcustomer confidence in the Firm or financial markets ingeneral. These conditions may be caused by eventsover which the Firm has little or no control. Thewidespread crisis in investor confidence and resultingliquidity crisis experienced in 2008 and into early 2009increased the Firm’s cost of funding and limited itsaccess to some of its traditional sources of liquiditysuch as securitized debt offerings backed by mortgages,credit card receivables and other assets, and there is noassurance that these conditions could not occur in thefuture.

Bank deposits are a stable and low cost source offunding. If the Firm does not successfully attract

Debt obligations of JPMorgan Chase & Co., JPMorganChase Bank, N.A. and certain of their subsidiaries arecurrently rated by credit rating agencies. These creditratings are important to maintaining the Firm’s liquidity.A reduction in these credit ratings could reduce theFirm’s access to debt markets or materially increase thecost of issuing debt, trigger additional collateral orfunding requirements, and decrease the number ofinvestors and counterparties willing or permitted,contractually or otherwise, to do business with or lend tothe Firm, thereby curtailing the Firm’s businessoperations and reducing its profitability. Reduction in theratings of certain SPEs or other entities to which theFirm has funding or other commitments could also impairthe Firm’s liquidity where such ratings changes lead,directly or indirectly, to the Firm being required topurchase assets or otherwise provide funding.

Critical factors in maintaining high credit ratings includea stable and diverse earnings stream, strong capitalratios, leading market shares, strong credit quality andrisk management controls, diverse funding sources, anddisciplined liquidity monitoring procedures. Although theFirm closely monitors and manages factors influencingits credit ratings, there is no assurance that such ratingswill not be lowered in the future. For example, the ratingagencies have indicated they intend to reevaluate thecredit ratings of systemically important financialinstitutions in light of the provisions of the DoddFrankAct that seek to eliminate any implicit governmentsupport for such institutions. In addition, several ratingagencies have indicated that recent economic andgeopolitical trends, including deteriorating sovereigncreditworthiness (particularly in the Eurozone), elevatedeconomic uncertainty and higher funding spreads, couldlead to downgrades in the credit ratings of many globalbanks, including the Firm. Any such downgrades fromrating agencies, if they affected the Firm’s credit ratings,may occur at times of broader market instability whenthe Firm’s options for responding to events may be morelimited and general investor confidence is low.

As a holding company, JPMorgan Chase & Co. relies onthe earnings of its subsidiaries for its cash flow and,consequently, its ability to pay dividends and satisfy itsdebt and other obligations. These payments bysubsidiaries may take the form of dividends, loans orother payments. Several of JPMorgan Chase & Co.’sprincipal subsidiaries are subject to capital adequacyrequirements or other regulatory or contractualrestrictions on their ability to provide such payments.Limitations in the payments that JPMorgan Chase & Co.receives from its subsidiaries could reduce its liquidityposition.

Some global regulators have proposed legislation orregulations requiring large banks to incorporate aseparate subsidiary in every country in which they

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funding. If the Firm does not successfully attractdeposits (because, for example, competitors raise theinterest rates that they are willing to pay to depositors,and accordingly, customers move their depositselsewhere), the Firm may need to replace such fundingwith more expensive funding, which would reduce theFirm’s net interest margin and net interest income.

separate subsidiary in every country in which theyoperate, and to maintain independent capital and liquidityfor such subsidiaries. If adopted, these requirementscould hinder the Firm’s ability to manage its liquidityefficiently.

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Part I

Legal Risk

JPMorgan Chase faces significant legal risks, bothfrom regulatory investigations and proceedings andfrom private actions brought against the Firm.JPMorgan Chase is named as a defendant or isotherwise involved in various legal proceedings,including class actions and other litigation or disputeswith third parties. There is no assurance that litigationwith private parties will not increase in the future,particularly with respect to litigation related to theissuance or underwriting by the Firm of mortgagebackedsecurities (“MBS”). Actions currently pending against theFirm may result in judgments, settlements, fines,