Finance paper

9-716-448 R E V : A U G U S T 1 4 , 2 0 1 8

Professor David Collis and Research Associate Ashley Hartman prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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D A V I D C O L L I S

A S H L E Y H A R T M A N

JPMorgan Chase after the Financial Crisis: What is the optimal scope of the largest bank in the U.S.?

Our businesses belong together, and there is exceptional value in the linkages among them. As separate entities, our businesses are currently well positioned; together they are even stronger. Putting our businesses together makes sense only if doing so creates value for customers and, ultimately, shareholders. It does not work because we want it to – it only works because it gives the customer more for less, sooner rather than later. We have no interest in selling our customers products that they do not want or need.

— Jamie Dimon, March 8, 2006

Introduction When Jamie Dimon took over as CEO of JPMorgan Chase & Co. (JPMorgan Chase) in 2005 he

reaffirmed the commitment to pursue a “Universal Bank” strategy – providing a full range of products and services to both retail and wholesale clients. Yet the merits of the universal bank had long been disputed. In 2006 Wachovia CEO Kennedy Thompson stated, “There is great value in the universal bank model for both customers and shareholders…Frankly, it’s not an easy model to execute, but if you can knit disparate businesses together in a way that brings greater value to customers, you will undoubtedly also deliver exceptional value to shareholders.”1 At the time, while discussing Morgan Stanley’s stock performance, a senior portfolio manager at Fidelity claimed, however, that the “universal bank model [was] a failed experiment.”2

After 2008, the Financial Crisis and subsequent Great Recession damaged many global and domestic financial services firms. While the Government bailed out universal banks and monoline financial institutions alike, both governments and public clamored for action against banks they deemed “too big to fail.” Regulators around the world stepped in to increase capital requirements while the U.S. government passed the Dodd-Frank bill, which improved transparency and accountability, and, with the Volcker Rule, limited banks’ ability to pursue proprietary trading. In response, many financial institutions reduced their scope and reshaped their portfolios.

In this context, JPMorgan Chase, the largest bank in the U.S. by assets since 2011, which had successfully weathered the financial crisis in part due to the benefits of diversification, emerged with a “fortress balance sheet” and an improved position in the banking league tables (Exhibits 1, 2 and 3).

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Nevertheless, the bank faced pressure from many directions, including large civil fines to settle, analysts’ arguments about its “conglomerate discount,” and regulation that penalized size, interconnectedness and complexity. Despite the pressure, Jamie Dimon remained vocal in advocating for the value of a broad scope, large scale financial services firm. However, questions remained about the optimal scope of the bank, and how JPMorgan Chase could best allocate resources across its diverse lines of business in the face of new regulations designed to limit size and complexity.

Financial Services Industry

How Banks Make Money

Financial institutions made money in two ways: net interest income and non-interest revenue. Net interest income represented approximately 65% of large U.S. banks’ revenues and was generated by taking customer deposits and lending them out to clients or investing them in securities at a higher interest rate to earn a spread (Exhibit 4a). Non-interest revenue was generated by charging customers for products and services such as deposit services, asset management, investment banking advice, and securities underwriting and trading.3 While all lines of business generated both types of revenue, consumer and commercial banking lines of business generated more income from interest rate spread, and asset management, payments, and investment banking businesses made more money from non- interest revenue (Exhibit 4b).

A key profitability metric for banks was return on tangible common equity (ROTCE) – net income applicable to common equity divided by average tangible common equity. Banks needed capital to support their growth, whether to absorb potential losses from customers defaulting on loans, trading losses or operational losses. They also needed to manage assets and liabilities in a prudent way so that a short-term deposit would be invested in highly liquid assets, while a long-term deposit could be invested in longer-term assets. To encourage banks to focus on credit risk, market risk, liquidity risk and stability, regulators imposed a series of rules and requirements on capital and liquidity.

Banks’ operating expenses included personnel costs, IT, real estate costs and marketing spend. Many of these costs were relatively fixed, creating operating leverage in each line of business – for example, when bond trading volumes fell after the Crisis, profitability fell, and many banks reduced the size of those activities.4 This cost structure also made the ability to leverage a client relationship across multiple businesses more valuable.

History

The modern U.S. banking system arrived in 1913 with the establishment of the Federal Reserve system to govern a historically local commercial banking business that had nearly 30,000 banks in 1920.5 In contrast, investment banking – securities underwriting and trading – had been concentrated on Wall Street. The Glass-Steagall Act of 1933, passed in response to bank failures during the Great Depression, reinforced this divide by prohibiting commercial banks from engaging in investment banking businesses. It also required banks whose deposits were insured by the newly formed Federal Deposit Insurance Corporation, to invest only in government bonds and other low-risk investments.

Although many considered commercial banks to be safer after Glass-Steagall was enacted, some critiqued the government for over-regulating a private industry. Others saw the value of careful regulation when the government bailed out nearly half the federally insured S&L’s (savings and loan associations) in the 1980’s6 at a cost of $130 billion,7 after deregulation had allowed them to expand from the traditional mortgage business into more speculative investments.

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The 1990s marked a period of consolidation as local and regional banks merged or were acquired by those intent on building national scale. As a result, the number of banks fell by 40% between 1989 and 1999, and the four largest, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, emerged to control about half the assets of the U.S. banking sector by 2014.8

As a climate of limited regulation took over in the early 2000s following the partial repeal of Glass- Steagall in 1999, markets for new products, including sub-prime mortgages, grew with little oversight from federal authorities. By 2005, large national banks had expanded into a broad range of commercial and investment banking businesses and other financial services. The economic environment also allowed banks to increase their leverage and reduce their liquidity, all of which boosted bank profitability, encouraging them to move into riskier products. (Exhibit 5).9

Everything changed with the Financial Crisis in 2007. As housing prices declined and homeowners defaulted on their mortgages, mortgage-backed securities lost value, triggering a liquidity crisis and a cascade of failures in other markets that brought on the Great Recession. In 2008, financial markets around the world went into decline; even large financial firms, such as Lehman Brothers and AIG, failed or had to be sold at fire-sale prices; and the government stepped in with emergency measures to preserve the financial system.

In October 2008, the Treasury established the Troubled Asset Relief Program (TARP), a $700 billion bailout for the financial sector, to recapitalize banks and other financial institutions. The Treasury and Federal Reserve also required large banks to conduct stress tests to see whether they had enough capital to survive another downturn. If not, they were ordered to raise additional capital. TARP was controversial from the start; both lawmakers and citizens were angry at the price tag and the idea of bailing out institutions they felt had sparked the crisis.10 Indeed, many were concerned at the risk of “moral hazard” resulting from the bailout – if executives knew that their errors would be redeemed by the government, they would take more risk, which would only invite future failures.

The financial crisis also led to cries for reform of institutions deemed “too big to fail.” Part of the justification for bailing out some institutions, like Bank of America and Citigroup, and not others, was that their failure would have brought down the entire financial system. Such “systemic risk” required special oversight of such large institutions to limit their potential to cause another crisis.

In 2010, President Obama signed the Dodd-Frank bill, which made sweeping changes to financial regulation. Its key goals included improving accountability and transparency, ending “too big to fail,” and preventing future bailouts. One of its major provisions was the Volcker Rule, which prevented proprietary trading, a strategy where banks used their own money to earn a profit. International authorities also increased oversight and reformed their financial industries. The Basel Committee – the global standard-setter for regulating banks – created the Basel III framework in 2010 to increase financial stability by revising its capital adequacy guidelines.

Regulatory Reforms and Capital Requirements

Basel III Basel III required banks to increase the quality and quantity of their capital, reduce leverage, increase short-term liquidity, and increase long-term balance sheet funding. National authorities adopted Basel III in 2010, and banks were mandated to fully implement the requirements by 2019, meeting interim deadlines along the way (Exhibit 6).11 U.S. banking regulators adopted Basel III in October 2013, and it became effective for U.S. banks on January 1, 2014.

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Basel III substantially increased bank capital requirements. From 2015 onwards banks were required to hold 4.5% of risk weighted assets in Common Equity Tier 1 (CET1) (essentially common stock and retained earnings) and 6% in Tier 1 capital (common equity and preferred stock, including TARP funds), up from 2% and 4% respectively.12 The risk attributed to each asset category varied, so that different assets required different levels of capital to be held. For example, loans would generally require more capital than cash and securities, and a riskier loan would require more capital than a safer one.

A supplementary leverage ratio (SLR) was also imposed by Basel III so that banks had to maintain a 3% ratio of Tier 1 Capital to total assets including certain non-balance sheet items. This was designed to limit exposure to derivatives and other off-balance-sheet assets that had contributed to the Financial Crisis. The U.S. Federal Reserve then raised that leverage ratio in 2013, requiring U.S. Bank Holding companies with more than $700B in assets or more than $10T in Assets Under Custody to maintain an SLR of 5% and their depository subsidiaries to maintain an SLR of 6%.

Finally Basel III introduced a liquidity coverage ratio (LCR) requiring banks to hold sufficient high- quality liquid assets to cover total net cash outflows over 30 days. Stable deposits, such as retail deposits, were assumed to have low outflows in stress, whereas less stable deposits, such as wholesale non-operating deposits, were assumed to have high outflows in stress. In addition, banks had to have stable funding to meet one year’s cash needs under a period of stress (NSFR).

G-SIFIs and G-SIBs In 2011, the U.S. Financial Stability Board published a list of G-SIFIs, which were banks, insurance companies, or other financial institutions that were deemed “too big to fail” because of their size, diversity and interconnectedness. Companies such as JPMorgan Chase, Bank of America, Goldman Sachs, MetLife, GE and State Street were included on the G-SIFI list.

Global Systemically Important Banks (G-SIBs) faced additional regulations designed to ensure that banks central to the financial system carried sufficient capital to ride out a crisis without the need for bailouts. The U.S. proposed CET1 surcharges for G-SIBs of between 1 and 4.5% above Basel III requirements (Exhibit 7). The surcharge was determined by a bank’s G-SIB score – a calculation based not on risk per se, but on the factors of size, diversity and complexity, lack of available substitutes, cross-jurisdictional activity, and interconnectedness. Combined with capital conservation and countercyclical buffers, some G-SIBs would be required to have a CET1 of up to 14% by January 2019, almost threefold the minimum in 2015.13

Other Regulatory Requirements Some banks were also subject to Federal Reserve stress tests; those with $10B or more in assets were subject to the Dodd—Frank Act stress test (DFAST), and those $50B or more in assets were subject to the Comprehensive Capital Analysis and Review (CCAR). CCAR was an annual test that evaluated institutions’ capital adequacy, internal processes for measuring capital adequacy, and any planned distributions of capital to shareholders. DFAST reviewed whether an institution had sufficient capital to withstand an economic downturn.14

Under the Resolution Plan introduced in the Dodd-Frank legislation, so-called “living wills” were also required of financial institutions. These outlined what the bank would do if it failed, so that the entity could be resolved without costs being imposed on taxpayers. While an onerous task for banks to develop such plans, these did not directly affect their operation and choice of scope.

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JPMorgan Chase

History

JPMorgan Chase was formed in 2000 when J.P. Morgan & Co. Incorporated merged with The Chase Manhattan Corporation, which had a long history of acquisitions and also served retail clients. The merged entity was a “universal bank” with domestic and international branches that provided a wide range of financial services including asset management, wealth management, card services, and investment banking.15 In 2004, JPMorgan Chase acquired Bank One Corporation (Bank One), itself a serial acquirer, for $59 billion to create the second largest financial institution in the U.S. with about 12% of the banking sector’s assets. (Further horizontal consolidation was unlikely since Federal regulation after 1994 prevented acquisitions by a bank controlling more than 10% of U.S. bank deposits). The combined bank was headed by Jamie Dimon as President and COO.

After graduating from Harvard Business School, Jamie Dimon had begun working for Wall Street legend Sandy Weill at American Express. Dimon was Weill’s protégé and right-hand man, following him to various companies as Weill created a financial services “supermarket” out of life insurance, property and casualty insurance, brokerage, and investment banking businesses at what became the Travelers Group. Named as President of Citigroup when Travelers merged with Citibank, Dimon was forced to resign shortly after by Weill in 1998. Bank One picked up Dimon, naming him Chairman and Chief Executive. After the merger with JPMorgan Chase, Dimon became CEO in 2005 and Chairman one year later.

JPMorgan Chase ended 2006 with record profits, but recognizing a decline in the credit quality of its assets, it cut costs and focused on preparing for tough times. It was the only large financial institution that continued to earn a profit during the crisis. Its conservative position and “fortress balance sheet” even enabled it to help the government by acquiring failing institutions. In March 2008, it struck a deal for $1.5 billion to save Bear Stearns, and in September, regulators brokered an emergency sale of mortgage giant Washington Mutual (WaMu) to JPMorgan Chase for $1.9 billion, although Dimon later regretted making the acquisitions.16

In 2012, JPMorgan Chase suffered a $6.2 billion trading loss at its Chief Investment Office (CIO). A trader in London, nicknamed the London Whale, took a set of large synthetic positions in corporate credit default swaps. While the Bank had a record year for net income even with the impact of the loss, many argued this demonstrated that JPMorgan Chase remained too large and complex, posing a serious risk to the financial markets.

JPMorgan Chase faced continuing regulatory pressure and increased expenses to address compliance requirements. Eager to resolve its legal issues, the bank increased legal reserves by nearly $20 billion from 2010 through 2013 to settle various cases, including those related to the CIO situation and mortgage matters that had occurred at Bear Stearns and WaMu.17 JPMorgan Chase acknowledged its mistakes and took responsibility for its actions while also emphasizing its efforts to become a better bank in the eyes of shareholders, customers, and regulators. The company added nearly 8,000 people to strengthen compliance and control capabilities. Dimon’s letter to shareholders emphasized the bank’s continuous focus on clients: “While we may make mistakes along the way, we never lose sight of why we are here. We believe that our long-term view and consistent behavior earn us the trust and respect of our clients and the communities in which we operate.”18 Nevertheless, many lobbied to separate the CEO and Chairman positions, both of which Dimon had held since 2006. Shareholder proposals regarding the separation of the position were put to a vote in 2012 through 2015, but were rejected each year.19

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Portfolio at end of 2014

In 2014, JPMorgan Chase was one of the largest companies in the world in terms of assets, with $2.6 trillion in assets on the balance sheet, and generated ~$100 billion in revenue, more than any competitor in the U.S. financial industry. The bank earned $22 billion in net income and its return on tangible common equity, at 13%, was only lower than that of Wells Fargo among peers. It had four main businesses: Consumer & Community Banking (CCB), the Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset Management (AM). The wholesale businesses, which included CIB, CB, and AM, contributed $54 billion to revenues, while CCB contributed $44 billion (Exhibit 8).

Consumer & Community Banking Consumer & Community Banking offered banking; credit card services; mortgage, auto and business banking loans; student loan services; and wealth management to consumers and small businesses through a variety of channels including bank branches; ATMs; and online, mobile and telephone banking. In 2014, CCB earned $44 billion in revenues, approximately $28 billion from net interest income and $16 billion from noninterest revenue. The target RoE for the business was 20%.

Corporate & Investment Bank JPMorgan Chase generated revenue from several different businesses within the CIB: banking, which included investment banking, lending, corporate banking and treasury services; investor services; and markets, which included equities and fixed income sales and trading. The CIB generated approximately $35 billion in revenues in 2014, of which $23 billion was noninterest revenue and $11 billion was net interest income. The scale of the business and its diverse revenue streams drove stability; the volatility of JPMorgan Chase’s markets revenue was 4%, significantly lower than the 11% figure for its top-10 peers.20 The CIB had market-leading positions (defined as top 3) in most of its products (Exhibit 9). The target RoE for the business was 13%.

Commercial Banking Commercial Banking served corporations, municipalities, financial institutions, nonprofits, and real estate investors that were larger than the small businesses served by CCB, but smaller than the largest corporations served by the CIB. Its primary segments included Middle Market Banking, Corporate Client Banking, Commercial Term Lending, and Real Estate Banking. CB partnered with other JPMorgan Chase businesses to offer lending, treasury services, investment banking and asset management services to clients. In 2014, CB earned $6.9 billion in revenue. The target RoE for the business was 18%.

Asset Management Asset Management focused on investment and wealth management activities for institutions, high-net-worth individuals and retail investors. Its investment products included a variety of asset classes, such as equities, fixed income, alternatives, and money market funds. The business also offered banking and lending services, advice on risk management, and tax and estate planning. In 2014, AM had $1.7 trillion assets under management and generated $12 billion in revenue. The target RoE for the business was 25%+.

Global Presence In addition to its breadth of products, JPMorgan Chase had established itself as a global bank with operations in over 100 countries and was a key player in international markets. In 2014, international clients accounted for 26% of the bank’s revenue, and the majority of them used five or more products. Over half the middle market clients of JPMorgan Chase thought they would have a quarter or more of their sales outside the US within five years.21

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Pressures to Reduce the Scope of JPMorgan Chase

Capital Cost Penalty

Although being a large-scale bank playing in a range of businesses generated many advantages for JPMorgan Chase, complexity also created challenges. In particular, as a universal bank JPMorgan Chase was more sensitive than competitors to the new set of capital requirements imposed by regulatory reforms. Indeed, it was the only U.S. bank to fall into the 4.5% G-SIB category, and so was placed at a disadvantage by having to carry more in equity capital to back every asset than any competitor.a With a total capital requirement of 11.5%, 100-200 basis points higher than its peers (Exhibit 7), its cost of providing services to customers was therefore higher than that of its competitors. For example, JPMorgan Chase had about a 30bps cost disadvantage in commercial lending against banks with simpler business models which could offer lower interest rates because they faced lower capital requirements.

Moreover, as of December 2014, JPMorgan Chase was $21 billion short of meeting the new Fed regulations, which were set to be phased in after 2016. To meet those requirements, the bank would either have to retain earnings or shrink and sell off certain assets, while carefully altering the mix of businesses in the portfolio to optimize profitability under the new regulatory constraints (see later).

External Pressures

Politicians

If an institution is too big to fail, it is too big to exist and that is the bottom line.

— Bernie Sanders

In mid-2015, Bernie Sanders, a U.S. senator running for President, introduced legislation to break up JPMorgan Chase and other big U.S. banks. Sanders believed they posed too much of a risk to the financial system as the failure of any one of them would force taxpayers to pay for another bailout.22

Hillary Clinton, former Secretary of State and current Presidential candidate, also proposed a plan to levy a risk fee on banks that were “too large and too risky to manage” and demanded that they reorganize, downsize, or break up. Other politicians with similar views included U.S. Senators Elizabeth Warren and John McCain. They believed a culture of greed and excessive risk-taking had been fostered since the law separating commercial and investment banking was repealed and wanted to remove government guarantees for high-risk transactions outside core banking activities. Martin O’Malley, another Presidential candidate, also expressed his concerns, commenting that if a bank was too big to fail, then “it’s too big and we must break it up before it breaks us.”23

Activists Activist investors were deeply involved in the conversation about the future of the banking industry, and many advocated breaking up big banks. In November 2014, Trian Fund Management acquired a large stake in Bank of New York Mellon and its founder, Nelson Peltz, earned a seat on the bank’s Board. He believed the bank should spin off its slower growth custody business from the more valuable asset and wealth management businesses.24 Similarly, Bartlett Naylor, who worked for the non-profit Public Citizen, had filed resolutions to break up big financial institutions for several years. In 2015, he was able to force a shareholder vote on whether Bank of America should

a Typically JPMorgan Chase did not come close to exceeding the new leverage or liquidity constraints in aggregate.

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create an independent committee to analyze the divestiture of all operations not related to its core banking activities, although ultimately shareholders cast over 95% of votes against the proposal.25

Analysts Industry analysts had long questioned whether JPMorgan Chase should retain its four businesses or break up to realize value. In 2012, Mike Mayo, an analyst at CLSA, stated “increasingly higher regulatory and capital requirements for large, global financial institutions place a higher burden on realizing synergies across segments which, combined with a higher-than-typical financial conglomerate discount, should at least bring the question of whether it makes sense to sell some portion of the firm more to the fore.” KBW analyst Christopher Mutascio echoed Mayo’s sentiments and showed that JPMorgan Chase was subject to a “conglomerate discount” as its separate businesses were worth 30% more than the bank as a whole when based on a sum-of-the-parts analysis.26 The individual businesses would trade at different P/E multiples on the open market. The asset management business, for example, which typically generated steady returns, had a higher earnings multiple than the more volatile investment banking business. JPMorgan Chase’s multiple tended to be that of the lowest of all its businesses and thus was valued at 15-20% discount to its theoretical value (based on a ROTCE vs. Stock Price/Tangible Book Value Per Share regression).

In January 2015, Goldman Sachs analyst Richard Ramsden published an oft-cited report about breaking up JPMorgan Chase. He argued that because each of the bank’s four businesses was among the best in its industry, each would be large enough and have the capabilities to thrive as an independent company. While JPMorgan Chase would lose approximately $4 billion in synergies, the breakup would be accretive to shareholders. Ramsden noted that JPMorgan Chase was trading at a 20% discount to its smaller rivals and that the separation could eliminate the discount.27

Alternatively, Ramsden suggested a spin-off, where the bank would divide into a traditional consumer and commercial bank, and an investment and trust bank. The scenario would allow JPMorgan Chase to retain some synergies but reduce its capital requirements as the lower complexity of the constituent parts would reduce its G-SIB score so that it would not be penalized with the 4.5% G-SIB charge. This capital reduction would result in the remaining JPMorgan Chase saving 0.5% of required capital when spinning off the trust bank, 2.5% when spinning off the investment bank, and 3.0% when spinning off both the trust bank and investment bank. As a result, spinning off the trust and investment bank, for example, would reduce required capital by $38 billion.

The report noted that while there was substantial upside involved in spinning off businesses, there was also obvious execution risk.28 Overall, in 2014 Mike Mayo from CLSA believed that with respect to universal banking, JPMorgan Chase had to, “prove it, or lose it.”

Academics Academic research produced mixed results regarding the benefits of scale and the synergies accruing to universal banks. The Bank of International Settlements reviewed 37 studies and found that only 15 stated there were benefits to size in banking.29 Research conducted before the 2010 reforms showed that big banks enjoyed lower funding and operating costs compared to smaller banks.30 However, post-reform, the funding advantage shrunk, with some estimating big banks operated at a $14 billion disadvantage annually.31

Academics also noted that since JPMorgan Chase was a leader in many areas, individual businesses did not need referrals to draw in customers seeking best-in-class institutions to satisfy their needs. The fact that the consumer and commercial bank branded itself as Chase, while other businesses selling to large corporations, governments, wealthy individuals and institutional investors were branded as JP Morgan, also suggested the viability of separate businesses.

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There was also concern over the effect that being part of a large-scale universal bank could have on individual businesses. Central oversight and coordination might restrict their autonomy, stifle entrepreneurship and limit their success. Moreover, the businesses required different skill sets, people, and processes, and it might be inappropriate to subject them all to the same policies and procedures. Separating a business that required less regulation, such as asset management, could potentially allow it to spend less on compliance and so unlock value.

Competitors’ Strategies

Financial services companies had historically adopted different strategies and were currently taking different approaches to adjust their portfolios in the face of similar pressures – many choosing to narrow their focus.

Goldman Sachs Goldman Sachs was perhaps the best example of a successful narrow scope or monoline competitor. Although it became a bank holding company under recent legislation, Goldman remained close to being a traditional investment bank. Its success came from its reputation and relationships with corporate clients for whom it performed M&A and advisory services; underwriting and securities trading. Goldman routinely held a top three ranking in global league tables, particularly as the leader in M&A deals. Goldman Sachs’ ROTCE in 2014 was 12%.

Morgan Stanley After 2010 Morgan Stanley shifted its focus away from its investment banking roots towards wealth management CEO James Gorman, who had joined the bank from Merrill Lynch, stated, “the benefits to Morgan Stanley of owning a wealth management business of scale are unmistakable: sizable and stable revenues, a substantial deposit base, low relative capital usage and a growing demand for professional advice.”32 Moving towards this less capital-intensive business, also gave Morgan Stanley more flexibility when dealing with Fed oversight and regulation. Morgan Stanley’s ROTCE in 2014 was 10%.

Bank of America In 2011, Bank of America launched a program focused on cost cutting in retail banking, credit cards, back office operations, and the investment bank, with the aim of saving $8 billion by 2015. As one journalist wrote, “Like other too-big-to-fail banks, Bank of America [was] transforming itself into a somewhat boring utility, not unlike AT&T of old.”33 Bank of America’s ROTCE in 2014 was 3%.

Wells Fargo While Wells Fargo had three operating segments – Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement – Community Banking generated 60% of its 2014 revenues and most of Wells Fargo’s deposits came from long-term relationships with retail customers. The bank noted it was “in a category of one when you consider the size and how different we are from what you’d consider as large money-center banks. Our DNA is much more regional, community bank in structure.”34 Wells Fargo was particularly effective at cross-selling retail customers; its motto was “eight is great” and clients on average used 7.2 products, such as credit cards, loans, and checking accounts. Wells Fargo’s ROTCE in 2014 was 16%.

G-SIFIs In 2015, General Electric decided to spin off its financial services unit, GE Capital, which had been designated as a G-SIFI and was subject to greater financial regulation. Similarly, in early 2016 MetLife, the global life insurance and employee benefits company, announced that it was splitting off its U.S. retail operations (producing about 20% of its total revenue) in large part because of the capital cost penalty imposed by the capital requirement its designation as a G-SIFI demanded.

Foreign Banks Increased regulations demanded simpler, less risky business models than pre- crisis, and reducing investment banking businesses was one way to limit earnings volatility. In the UK

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in 2015, Royal Bank of Scotland announced it was cutting 14,000 of its 18,000 investment banking jobs, while Barclays replaced its CEO, investment banker Bob Diamond, and announced it would also pare down its banking division when performance did not improve.35 Similarly, Credit Suisse reduced its investment bank to focus on wealth management

Other rationalizations concerned a bank’s geographic footprint. Post-crisis, HSBC revealed that it was planning to cut 50,000 jobs, many related to selling businesses in Brazil and Turkey.36 Deutsche Bank’s reorganization plan aimed to decrease the number of clients it served, close operations in ten countries, and exit certain products.37

Banks based in emerging markets were growing in strength partly because they did not face the same restrictions as banks in the U.S. and were often supported by government initiatives. In 2014, the top four most profitable banks were Chinese.38 They were also expanding; the Industrial and Commercial Bank of China, one of China’s ‘Big Four’ state-owned banks, had branches or subsidiaries in over fifty countries by 2014.39

Non-traditional Competitors: New banking alternatives were beginning to emerge in Silicon Valley – so-called “fintechs.”Marketplace lenders, such as startups Earnest and Upstart, analyzed the backgrounds of potential borrowers, including where they went to school and what they studied, to select candidates and approve loans online in minutes. In 2014, such marketplace lenders issued $9 billion of loans, up from $3.4 billion the year before.40 In wealth management, robo-advisors, like Wealthfront and Betterment, offered automated online financial advice at very low cost. In the payments space, competitors such as Bitcoin, PayPal, and Square were gaining traction.

Although JPMorgan Chase acknowledged it was quite successful in the technology space, it also conceded that it had a lot to learn regarding real-time processing, better encryption techniques, and reduction of costs and “pain points” for customers.41 In late 2015 it announced an alliance with On- Deck Capital to serve commercial borrowers online with loans of less than $250,000, as a way to address effective online customer interfaces and processes.42

Demonstrating the Value of the Universal Banking Model

Stakeholder Benefits

In response to these pressures JPMorgan Chase argued that the universal banking model benefitted multiple stakeholders, including clients, employees, shareholders and society, and it continued to focus on strong execution in order to capture synergies across its businesses. It also aimed to further reduce costs and sought to eliminate certain products and services that were no longer adding sufficient value to the franchise. At the core of the value proposition was the stability of revenues and income generated by a diverse group of businesses at scale.

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 competitors are not.43

— Jamie Dimon

Clients One of the greatest advantages of being a large scale integrated bank was JPMorgan Chase’s ability to provide all the products a customer needed, such as offering retail customers products ranging from deposit accounts and credit cards to mortgages and wealth management. Smaller commercial clients, for example, would choose JPMorgan Chase because of the one-stop shop

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benefits of unified access to credit, card services, payment processing, cash management, and treasury services, particularly when they had limited staff of their own and wanted easy execution, speed and simplicity in their financial transactions. The bank could also offer services that supported a client through its lifecycle. An initial credit relationship might grow over time into providing foreign exchange services when the client began exporting, taking the company public in an IPO, providing M&A advice as it expanded, and so on.

Nevertheless, not all of the bank’s services and products were equally profitable. In his 2014 annual letter to shareholders, Dimon noted that “a complex business that has many products is not earning the same ROE on every product. Many industries have historic structural issues that lead to some products being loss leaders (e.g., selling milk at grocery stores).” Indeed, the bank was willing to offer some products that generated poor returns in order to attract and retain customers. The reputational impact of performing poorly in one line of business also pressured all parts of the bank to deliver best in class service to preserve the client relationship. In contrast, a monoline competitor might take a more transactional approach to each service.

JPMorgan Chase was successful at developing deep client relationships and cross-selling its products. In CCB, each household used an average of 7.8 products and services, including deposits (interest checking, money market, etc.), credit (loans, credit cards, etc.), investments, and services (online banking, mobile banking, etc.). Commercial Banking clients averaged nine products with the bank and longer term relationships used more than twenty, while the CIB reduced its single-product international client relationships by over 30% from 2011 to 2014, so that nearly half its international clients used five or more products in 2014.

Jamie Dimon noted that this success came from adopting a customer centric approach, “if we provide products that are better, faster, cheaper for them, we will win.”44 It was not automatic that the company would win additional business from existing customers; it needed to have the best asset management business, the best investment bank, etc. for the customer to choose them.

Employees The large scale banking model also benefited employees, who were able to move across businesses and locations as they advanced their careers. Retaining talented employees was crucial for JPMorgan Chase to succeed, and being able to offer a variety of career options enhanced the bank’s ability to attract, motivate, and retain its workforce. Talent planning at JPMorgan Chase consciously managed careers to achieve cross– business, function and geography transfers.

Shareholders Many praised JPMorgan Chase’s performance during the financial downturn, arguing that its conservative position and diverse businesses allowed it to successfully navigate the crisis when many of its competitors could not. Post-crisis, the bank continued to perform well. Despite requirements to increase capital and liquidity, the company returned $10 billion in capital to shareholders through dividends and stock buybacks in 2014, and each of its individual businesses performed in line with its best-in-class competitors in terms of efficiency and returns (Exhibit 10).

Society

“We have a huge obligation to society – not only must we never fail, but we need to be steadfast. Never failing means having the financial 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.” 45

— Jamie Dimon

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Dimon believed that JPMorgan Chase had many “moats,” such as its economies of scale, expertise, and competitive advantages that protected it from tough times. Its fortress balance sheet and diverse businesses also provided the stability necessary to weather economic downturns (Exhibit 11). Dimon was determined to create a stable institution for the greater good, stating, “In the toughest of times, it is not about making a profit. It is about helping your clients survive.”46 During the financial crisis, JPMC understood the importance of lending money to clients and had been in a position to support them through the hard times.

Synergies

Expense Synergies As CFO Marianne Lake stated, in the event of a breakup, “you’d need two finance functions, two audit functions, two risk functions, two boards, two operating committees, and two Investor Days…Mortgage platforms, data centers—these are not trivial things.”47 The company realized expense synergies through such shared corporate infrastructure and technology, having, for example a single loan operations function for the entire bank. The bank’s scale also allowed it to share development costs for common projects, such as cybersecurity, that could cost hundreds of millions of dollars, and to share learning across businesses, such as for digital/mobile solutions. In a breakup scenario there would also be significant costs to add capital buffers to stand-alone businesses (Exhibit 12).48 Moreover JPMorgan Chase could spend three years executing the split – “time and attention better spent running the bank.”49

Revenue Synergies Revenue synergies were realized across and within all of JPMorgan Chase’s businesses (Exhibit 13 a and b). For example, over 80% of Commercial Banking clients used Treasury Services (TS) products, which were offered through the CIB, and CB clients also generated 35% of North America’s investment banking fees. With respect to Asset Management, there were many referrals between the Private Bank (PB) and the investment bank and PB clients often participated in the investment bank’s equity offerings,50 while asset management customers were key clients of the CIB’s global custody and fund services. TS products were also used by Chase retail and small business customers. Indeed, Steve Black, former vice-chairman of JPMorgan Chase stated, “I would argue that we would never have been able to build out the JPMorgan investment bank without the benefit of being a universal banking model and having credit.”51

Similarly, Asset Management benefitted from serving commercial bank clients and Chase Private Clients through the branch network, leveraging the PB platform to offer managed product solutions to those clients.52 As a last example, Consumer and Community Banking generated revenue from Commercial Banking clients, mainly through providing card services revenue. Approximately 55% of Commercial Banking clients visited a retail branch quarterly.53

However, JPMorgan Chase’s disclosure pointed out that nearly half of its revenue synergies came from synergies within businesses, which would ostensibly still exist even if the company were broken up. As a result Goldman Sachs had a more conservative estimate of lost synergies.54

Execution to Capture Synergies

The premise of the value of the universal bank model at JPMorgan Chase was that strong execution in delivering the whole firm to clients would maximize economic value. The bank aspired to create a holistic experience for clients across its lines of business, and the belief was that cross-selling was the outcome of a deep client relationship established early in a customer life-cycle.

JPMorgan Chase carefully segmented customers so that there was no conflict between businesses and each could focus on its own market while still maximizing value for the firm as a whole. Consumer

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and Community Banking had formal ownership of relationships with firms which had revenue below $20 million p.a., and handed over the account to Commercial Banking when the client passed that size. Commercial Banking kept some of its own bankers in retail branches to support this activity and after the WaMu acquisition gave JPMorgan Chase a branch footprint on the West Coast, it grew market share in that region. Similarly, the CIB had dedicated bankers to support Commercial Banking clients, whereas a standalone investment bank might have underserved smaller customers.

Internal processes were in place to manage the handoff between businesses, and these ensured that the allocation of revenues provided incentives for all personnel to act according to the common good. More importantly, JPMorgan Chase strove to foster a culture of collaboration, a goal that was widely communicated and known by all. Account planning for clients would involve multiple businesses of the bank, and would, for example, alert the investment bank and the private bank to opportunities resulting from a likely future IPO. While the bank may agree to make a loan or some other single product available at a return that was below the bank’s usual hurdle rates if necessary to maintain a relationship, the bank had the tools to measure overall client profitability and relationship officers were held accountable for, and rewarded for, that performance. These practices had been harmonized over decades and Jamie Dimon had been adamant that conflict between businesses that emerged after certain acquisitions were to be overridden. In monthly reviews of each business, he focused on the key issues they confronted with a consistent attention to detail.

Through this strong execution aimed at capturing synergies, each business within the bank would be stronger because it could draw on broad-based capabilities in terms of technology, brand, scale and financial wherewithal. It was true, for example, that Commercial Banking suffered a 30bps disadvantage in loan pricing against smaller banks because of JPMorgan Chase’s capital cost penalty under G-SIB. However, that disadvantage could be overcome by the scale benefits of lower operating costs (Commercial Banking had a 600bps overhead cost advantage against the industry average); lower credit losses through deep insight into clients’ individual business as well as their broader industries (it had a 60bps advantage in credit losses over the business cycle); and processes that would ensure the capture of additional revenue streams through cross-selling.

Business Simplification

By 2015, Jamie Dimon noted the company had shed approximately $25 billion in assets through its simplification efforts since 2012 (Exhibit 14).55 JPMorgan Chase also committed to a cost savings program. Part of these savings came from reducing technology and operational expenses, such as cutting unused telephone lines and hotel and black car usage, as well as lowering personnel costs, but more than half of the savings in the CIB, for example, came from exiting certain businesses that were not essential to serving core clients, or that were unprofitable in the new environment.56b

One portfolio change, for example, was to exit the physical commodities business due to regulatory requirements demanding increased capital and uncertainties about the regulatory framework for the business. Other factors were the high operating risk of the business and the fact that the profit generated from commodities trading was below the bank’s hurdle rate after the new capital charges were enacted.

In the fall of 2013, the consumer bank exited its student loan origination business after determining that competition from the U.S. government’s direct lending program and increased regulation reduced

b The portfolio review which triggered these decisions also considered reputational risk, so that payday lending, for example, was excluded; and ability to become a market leader in the segment.

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its attractiveness. Indeed, Wells Fargo remained the only major U.S. commercial bank still involved in student loans as the business shrank from $25 billion in 2008 to $8 billion in 2012.57 The consumer bank also simplified its mortgage banking products, reducing the number offered from 37 to 18, and with a target of further reducing to 15 in 2015, leaving it with those that would still meet the needs of 97% of its clients.58 JPMorgan Chase also spun off its private equity business, One Equity Partners, wanting to focus on its client business instead of using capital to make investments.

Balance Sheet Optimization

While JPMorgan Chase had always examined the return on capital of its various lines of businesses and carefully allocated resources across businesses accordingly, conditions after the Financial Crisis made these decisions more complex.

The fundamental attractiveness of several businesses had changed as demand shifted, regulations altered capital requirements, and competitors exited or limited investment in certain areas. McKinsey, for example, predicted that the ROE of securities sales and trading would decline from 20% to approximately 7% given higher costs of liquidity and funding and the requirement to more than double Tier 1 capital.59 New limits on proprietary trading and over-the-counter (OTC) derivatives also made U.S. banks far less competitive in these businesses compared to less-regulated firms in the U.S. or internationally. Conversely, opportunities presented themselves to JPMorgan Chase as other banks exited certain businesses, such as trading, allowing the bank to gain share and further exploit economies of scale.

In addition, while the bank had always had its own frameworks for stress testing risk tolerance and leverage, G-SIB, which was not based on risk per se but penalized complexity and interconnectedness, was a new and different constraint on the portfolio. Allocating too many resources to a certain business, however profitable it was, might trigger additional capital requirements and so raise the cost of capital for the entire bank, while exiting a business that contributed to the complexity of the bank could reduce capital requirements and improve the overall competitiveness of the institution. The CIB, for example, took action to reduce its contribution to the G-SIB score by aggressively reducing its outstanding notional volume of OTC derivatives, controlling its Level 3 (very illiquid) assets, and curbing its repo risk. Conversely, increasing the commercial loan portfolio helped the G-SIB calculation and so was encouraged.

But since different businesses were bound by different constraints, JPMorgan Chase had to consider a complex operations research problem beyond simply looking at the relative returns in different businesses when allocating capital across the portfolio. The consumer business, for example, was typically bound by CCAR as it had many loans and credit risk that had the potential to add losses in stress scenarios. For other businesses, like prime brokerage, the cap on the bank’s leverage might limit how much capital could be applied. In general, the consumer bank was limited by CCAR constraints, the wholesale banking businesses by G-SIB, CET1 and leverage constraints.

Having determined the theoretically optimal allocation of capital across businesses, JPMorgan Chase placed a strategic overlay on the results. This reintroduced the client perspective to take into account possible synergies across the portfolio. If, for example, prime brokerage loans were less profitable or pushed the bank against its leverage limit, the business might still be funded because it supported client relationships that were profitable in total, spread the fixed cost of those relationships, or utilized the leverage capacity created by the consumer businesses.

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Non-Operating Deposits

One particularly difficult portfolio decision was confronting Jamie Dimon. Non-operating deposits were short-term client deposits that could be recalled from a bank on short notice, even if some of these were in practice sticky. Of the bank’s $390 billion in deposits from financial institutions, approximately $200 billion were classified as non-operating.

JPMorgan Chase traditionally placed these non-operating deposits with the Fed at a return of 25bps while spending approximately 15bps on FDIC insurance. The bank had historically been happy with earning the 10bps spread on these assets since they carried zero risk and accommodated client needs. However, carrying them increased the bank’s complexity under G-SIB regulations and the increased G-SIB score effectively increased capital requirements for the whole bank by approximately 25bps, which would be applied to the entire bank’s $1.6T of Risk Weighted Assets. As a result it now confronted a negative return in this line of business.

Given these changes, what should JPMorgan Chase do with non-operating deposits? Should the bank exit this business and risk alienating important clients; keep the business even at a loss; attempt to reprice the business to recover the additional cost the G-SIB penalty imposed on JPMorgan Chase; or place it in a money market fund which returned more than the Fed’s 25bps but which had limited capacity available? Indeed, Dimon was currently looking at a proposal to reduce non-operating deposits by about $100 billion.

Conclusion Jamie Dimon recognized the validity of increased capital requirements after the Great Recession

although he questioned some of the details as applied to JPMorgan Chase specifically, and a universal bank in general.

We agree with the regulator. We need to get rid of too big to fail. The concept that if a bank fails either the American citizen has to pay or the economy has to pay, I completely understand we‘ve got to eradicate that from America. It’s not acceptable to me. It’s not acceptable to anyone else. And I think they put in the tools that make that doable.

— Jamie Dimon May 27, 201560

Fundamentally, however, he believed in the benefits to clients, employees, shareholders and society of the universal bank. Acknowledging the need for JPMorgan Chase to adapt to new capital requirements, he believed the bank had a strategy in place to do so. Following that strategy would demonstrate that the “conglomerate discount” was unfair and so would disappear over time as regulatory uncertainty was resolved and the difficulty other banks would encounter if they replicated the strategy became apparent.

Yet some questions remained. Did it make sense to stay as broad and diversified in the current environment as it had in the past? Could parts of the bank be spun off – perhaps by creating a retail and a wholesale bank? And did the bank have to remain in businesses that incurred capital penalties under the new regulations designed to limit bank size and complexity? For example, what about the $200 billion in non-operating deposits which were currently unprofitable given the capital required to be held against them – should they be eliminated, or did their value to clients justify maintaining them in the portfolio? Perhaps starting with that decision would clarify how JPMorgan Chase could make decisions about its future scope.

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Exhibit 1 Stock Price Performance (2006 – 2015)

Source: Capital IQ.

 

 

 

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Exhibit 2 JPMorgan Chase Income Statement

 

Year ended December 31, (in millions, except per share data) 2012 2013 2014

Revenue Investment banking fees 5,808$ 6,354$ 6,542$ Principal transactions 5,536 10,141 10,531 Lending- and deposit-related fees 6,196 5,945 5,801 Asset management, administration and commissions 13,868 15,106 15,931 Securities gains(a) 2,110 667 77 Mortgage fees and related income 8,687 5,205 3,563 Card income 5,658 6,022 6,020 Other income 4,258 3,847 2,106

Noninterest revenue 52,121 53,287 50,571

Interest income 55,953 52,669 51,531 Interest expense 11,043 9,350 7,897

Net interest income 44,910 43,319 43,634

Total net revenue 97,031 96,606 94,205

Provision for credit losses 3,385 225 3,139

Noninterest expense Compensation expense 30,585 30,810 30,160 Occupancy expense 3,925 3,693 3,909 Technology, communications and equipment expense 5,224 5,425 5,804 Professional and outside services 7,429 7,641 7,705 Marketing 2,577 2,500 2,550 Other expense 14,989 20,398 11,146

Total noninterest expense 64,729 70,467 61,274

Income before income tax expense 28,917 25,914 29,792 Income tax expense 7,633 7,991 8,030 Net income 21,284$ 17,923$ 21,762$

Source: JPMorgan Chase 2014 Annual Report.

 

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Exhibit 3 JPMorgan Chase Balance Sheet

 

December 31, (in millions, except share data) 2013 2014 Assets

Cash and due from banks 39,771$ 27,831$ Deposits with banks 316,051 484,477 Federal funds sold and securities purchased under resale agreements (included $28,585 and $25,135 at fair value) 248,116 215,803 Securities borrowed (included $992 and $3,739 at fair value) 111,465 110,435 Trading assets (included assets pledged of $125,034 and $116,499) 374,664 398,988 Securities (included $298,752 and $329,977 at fair value and assets pledged of $24,912 and $23,446) 354,003 348,004

Loans (included $2,611 and $2,011 at fair value) 738,418 757,336 Allowance for loan losses (16,264) (14,185)

Loans, net of allowance for loan losses 722,154 743,151 Accrued interest and accounts receivable 65,160 70,079 Premises and equipment 14,891 15,133 Goodwill 48,081 47,647 Mortgage servicing rights 9,614 7,436 Other intangible assets 1,618 1,192 Other assets (included $12,366 and $15,187 at fair value and assets pledged of $1,396 and $2,066) 110,101 102,950

Total assets 2,415,689$ 2,573,126$

Liabilities Deposits (included $8,807 and $6,624 at fair value) 1,287,765 1,363,427 Federal funds purchased and securities loaned or sold under

repurchase agreements (included $2,979 and $5,426 at fair value) 181,163 192,101 Commercial paper 57,848 66,344 Other borrowed funds (included $14,739 and $13,306 at fair value) 27,994 30,222 Trading liabilities 137,744 152,815 Accounts payable and other liabilities (included $36 and $25 at fair value) 194,491 206,954 Beneficial interests issued by consolidated variable interest entities (included $2,162 and $1,996 at fair value) 49,617 52,362 Long-term debt (included $30,226 and $28,878 at fair value) 267,889 276,836

Total liabilities 2,204,511$ 2,341,061$

Stockholders’ equity Preferred stock ($1 par value; authorized 200,000,000 shares: issued 2,006,250 and 1,115,750 shares) 11,158 20,063 Common stock ($1 par value; authorized 9,000,000,000 shares; issued 4,104,933,895 shares) 4,105 4,105 Additional paid-in capital 93,828 93,270 Retained earnings 115,756 130,315 Accumulated other comprehensive income 1,199 2,189 Shares held in RSU trust, at cost (472,953 and 476,642 shares) (21) (21) Treasury stock, at cost (390,144,630 and 348,825,583 shares) (14,847) (17,856)

Total stockholders’ equity 211,178$ 232,065$

Total liabilities and stockholders’ equity 2,415,689$ 2,573,126$

Source: JPMorgan Chase 2014 Annual Report.

 

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Exhibit 4a Revenue Components of Banks

 

Source: M. O’Connor, A. Chaim, R. Placet, & D. Ho, “US Large Cap Banks,” Deutsche Bank Analyst Report, May 11, 2011, accessed October 2015.

 

Exhibit 4b 2014 Composition of Global Banking Revenue and Profits ($ billion)

Source: “The Fight for the Customer,” McKinsey Global Banking Annual Review 2015.

 

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Exhibit 5 Global Banking Industry Return On Equity 2000-2014 (%)

Source: “The Fight for the Customer,” McKinsey Global Banking Annual Review 2015.

Note: Based on a sample of listed banks with >$10 billion in assets.

 

Exhibit 6 Basel III Proposals

 

 

Source: “Basel III: Issues and Implications,” KPMG, 2011, http://www.kpmg.com/global/en/issuesandinsights/ articlespublications/documents/basell-iii-issues-implications.pdf, accessed November 2015.

Note: CCP = Central Counterparties. OTC = Over-the-counter Derivatives.

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Exhibit 7 JPMorgan Chase Capital Constraints & Requirements vs. Peers in 2014

 

 

 

Table 1 – U.S. Banks’ G-SIB Surcharge Under the Final Rule’s Two Calculation Methodologies

G-SIB Basel Method* G-SIB Method** Increase JPMorgan Chase 2.5% 4.5% 2.0% Citigroup 2.0% 3.5% 1.5% Bank of America 1.5% 3.0% 1.5% Goldman Sachs 1.5% 3.0% 1.5% Morgan Stanley 1.5% 3.0% 1.5% Wells Fargo 1.0% 2.0% 1.0% State Street 1.0% 1.5% 0.5% Bank of New York Mellon 1.0% 1.0% 0.0%

* Basel method estimate using 2013 year-end data ** Fed estimate using 2014 year-end data

Table 2 – U.S. Banks’ Estimated Common Equity Tier 1 (CET1) Surplus / Shortage with Fully Phased-in G-SIB Surcharge

G-SIB CET1 – Current* CET1 – required** (US-

specific method) CET1 surplus /

shortage JPMorgan Chase 10.2% 11.5% -1.3% Citigroup 13.1% 10.5% 2.6% Bank of America 12.3% 10.0% 2.3% Goldman Sachs 12.2% 10.0% 2.2% Morgan Stanley 12.6% 10.0% 2.6% Wells Fargo 11.0% 9.0% 2.0% State Street 12.5% 8.5% 4.0% Bank of New York Mellon 11.2% 8.0% 3.2%

* Based on 2014 year-end data ** Includes the 2.5% capital conservation buffer

Source: ”Key points from the Fed’s final G-SIB surcharge rule” PwC, July 22, 2015, http://www.pwc.com/us/en/financial- services/regulatory-services/publications/assets/final-g-sib-surcharge-rule.pdf, accessed February 2016.

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http://www.pwc.com/us/en/financial-services/regulatory-services/publications/assets/final-g-sib-surcharge-rule.pdf
http://www.pwc.com/us/en/financial-services/regulatory-services/publications/assets/final-g-sib-surcharge-rule.pdf

 

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Exhibit 8 JPMC Segment Financials

 

Source: JPMorgan Chase 2014 Annual Report.

 

 

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Exhibit 9 Market Position of JPMorgan Chase Businesses 2014 vs. 2006

 

 

Source: JPMorgan Chase 2014 Annual Report.

Note: AUC = Assets Under Custody. AUM = Assets Under Management. FICC = Fixed Income Clearing Corporation. NCO = Net Charge-Off. TTC = Through-the-Cycle. For footnoted information, refer to slides 11 and 50 in the 2015 Firm Overview Investor Day presentation, which is available on Form 8-K as furnished to the SEC on February 24, 2015, http://files.shareholder.com/downloads/ONE/1666540762x0xS19617-15-276/19617/filing.pdf.

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Exhibit 10 JPMorgan Chase vs. Competitors in Cost Efficiency and Returns

Source: JPMorgan Chase 2014 Annual Report.

 

 

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Exhibit 11 Non Interest Revenue (NIR) Volatility vs. Peers (2010 – 2014)

 

 

Source: Investor Day 2015 Firm Overview dated February 24, 2015, accessed August 2015.

 

 

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Exhibit 12 Separation Scenario into Chase and JPMorgan

Source: Investor Day 2015 Firm Overview dated February 24, 2015, accessed August 2015.

 

 

 

 

 

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Exhibit 13a JPMorgan Chase Revenue and Cost Synergies Generate $6-7 billion in Net Income

Source: Investor Day 2015 Firm Overview dated February 24, 2015, accessed August 2015.

 

Exhibit 13b JPMorgan Chase Cost and Revenue Synergies

 

Source: Investor Day 2015 Firm Overview dated February 24, 2015, accessed August 2015.

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Exhibit 14 JPMorgan Chase Business Simplification Initiatives

Source: JPMorgan Chase 2014 Annual Report.

 

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Endnotes

1 B. Rehm, “Wachovia Chief’s Vision: Handful of Dominant Firms,” American Banker, May 19, 2006, https://global.factiva.com/ha/default.aspx#./!?&_suid=144607161748707093092449940741, accessed October 2015.

2 L. Thomas, “Countdown at Morgan Stanley,” The New York Times, March 10, 2005, Factiva, accessed October 2015.

3 M. O’Connor, A. Chaim, R. Placet, & D. Ho,“US Large Cap Banks,” Deutsche Bank Analyst Report, May 11, 2011, accessed October 2015.

4 J. Baer, “Morgan Stanley to Cut a Quarter of Bond, Currency Trading Jobs,” The Wall Street Journal, November 30, 2015, http://www.wsj.com/articles/morgan-stanley-plans-deep-cuts-to-bond-currency-trading-group-1448924275, accessed February 2016.

5 Gordon, J. “A Short Banking History of the United States,” The Wall Street Journal, October 10, 2008, http://www.wsj.com/articles/SB122360636585322023?alg=y, accessed January 2016.

6 Curry, T. and Shibut, L. “The Cost of the Savings and Loan Crisis: Truth and Consequences,” FDIC Banking Review, December 2000, https://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf, accessed October 2015. Sherman, M. “A Short History of Financial Deregulation in the United States,” Center for Economic and Policy Research, July 2009, http://www.cepr.net/documents/publications/dereg-timeline-2009-07.pdf, accessed October 2015.

7 General Accounting Office, July 12, 1996.

8 C. Lown, C. Osler, P. Strahan, & A. Sufi, “The Changing Landscape of the Financial Services Industry: What Lies Ahead?” Federal Reserve Bureau of New York, October 2000, http://www.fednewyork.org/research/epr/00v06n4/0010lown.pdf, accessed October 2015.

9 M. O’Connor, A. Chaim, R. Placet, & D. Ho, “US Large Cap Banks,” Deutsche Bank Analyst Report, May 11, 2011, accessed October 2015.

10 A. Blinder & M. Zandi, “How the Great Recession Was Brought to an End,” July 27, 2010, http://www.princeton.edu/~blinder/End-of-Great-Recession.pdf, accessed November 2015.

11 “Basel III: Issues and Implications,” KPMG, 2011, http://www.kpmg.com/global/en/issuesandinsights/articlespublications/documents/basell-iii-issues-implications.pdf, accessed November 2015.

12 “New Capital Rule Quick Reference Guide for Community Banks,” Office of the Comptroller of the Currency, July 2013, http://www.occ.treas.gov/news-issuances/news-releases/2013/2013-110c.pdf, accessed October 2015.

13 “G-SIB capital: A look to 2015,” PwC, December 2014, http://www.pwc.com/us/en/financial-services/regulatory- services/publications/g-sib-proposal.jhtml, accessed August 2015.

14 “Stress Tests and Capital Planning,” Federal Reserve Board Website, June 25, 2014, http://www.federalreserve.gov/bankinforeg/stress-tests-capital-planning.htm, accessed September 10, 2015.

15 About JPMorgan Chase Homepage, http://www.jpmorganchase.com/corporate/About- JPMC/document/shorthistory.pdf, accessed October 2015.

16 “Timeline: Jamie Dimon, the Chief of Too Big to Fail,” The New York Times, May 20, 2015, http://www.nytimes.com/interactive/2013/05/20/business/dealbook/20130520-jamie-dimon- timeline.html?_r=0#/#time253_7475, accessed October 2015.

17 T. Agrawal & D. Henry, “JPMorgan’s profit misses; posts unexpected $1 billion legal expense,” Reuters, October 10, 2014, http://www.reuters.com/article/2014/10/15/us-jpmorgan-results-idUSKCN0I30TX20141015, accessed September 2015.

18 Jamie Dimon’s Letter to Shareholders in JPMorgan Chase’s 2013 Annual Report.

19 D. Kopecki & H. Son, “JPMorgan Shareholders Reject Splitting CEO Dimon’s Dual Roles,” Bloomberg, May 21, 2013, http://www.bloomberg.com/news/articles/2013-05-21/victory-for-dimon-as-jpmorgan-shareholders-reject-ceo-chairman- split, accessed September 2015.

 

 

For the exclusive use of D. Perera, 2020.

This document is authorized for use only by David Perera in International Banking taught by MANUEL LASAGA, Florida International University from Jan 2020 to Jul 2020.

 

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716-448 JPMorgan Chase after the Financial Crisis: What is the optimal scope of the largest bank in the U.S.?

30

 

20 Corporate and Investment Bank Investor Day Presentation dated February 24, 2015.

21 “Business Leaders Outlook,” Chase, https://www.chase.com/content/dam/chasecom/en/commercial- bank/documents/mid-market-business-leaders-outlook-2014.pdf, accessed March 2016.

22 H. Przybyla, “Bernie Sanders Proposes Bill to Break Up Big Banks and Pressure Hillary Clinton,” Bloomberg, May 6, 2015, http://www.bloomberg.com/politics/articles/2015-05-06/sanders-proposes-bill-to-break-up-big-banks-and-pressure-clinton, accessed September 2015.

23 J. Ernst, ”Elizabeth Warren’s Crusade to Separate Investment and Commercial Banks,” The New York Times, July 31, 2015, http://mobile.nytimes.com/2015/07/31/business/dealbook/elizabeth-warrens-crusade-to-separate-investment-and- commercial-banks.html?referrer=, accessed September 2015.

24 “Trian Partners Says Removing BNY CEO Would Be ‘Dumbest Thing They Could Do’,”Value Walk, March 12, 2015, http://www.valuewalk.com/2015/03/trian-partners-bny-mellon/, accessed October 2015.

25 A. Currie, “Putting a Breakup of Bank of America to a Shareholder Vote,” March 20, 2015, http://www.nytimes.com/2015/03/20/business/dealbook/putting-a-breakup-of-bank-of-america-to-a-shareholder- vote.html, accessed October 2015.

26 H. Touryalai, “Split Up JPMorgan Chase And Value Jumps $59B: Analyst,” Forbes, August 23, 2013, http://www.forbes.com/sites/halahtouryalai/2013/08/23/jpmorgan-chase-value-jumps-by-59b-if-broken-up-analyst/, accessed November 2015.

27 M. Farrell, “Goldman Says JPMorgan Could Be Worth More Broken Up,” The Wall Street Journal, January 5, 2015, http://blogs.wsj.com/moneybeat/2015/01/05/goldman-says-j-p-morgan-could-be-worth-more-broken-up/, accessed November 2015.

28 R. Ramsden, “New capital rules reignite the JPM breakup debate,” Goldman Sachs Analyst Report, January 5, 2015.

29 O. Ralph, “Lex in Depth: Universal Banks,” Financial Times, March 29, 2015, http://www.ft.com/intl/cms/s/0/a21b7454- d243-11e4-ae91-00144feab7de.html#slide0, accessed November 2015.

30 E. Stephenson & J. Spicer, “U.S. banks enjoy ‘too-big-to-fail’ advantage: Fed study,” Reuters, March 25, 2014, http://www.reuters.com/article/2014/03/25/us-usa-banks-systemic-idUSBREA2O19320140325, accessed November 2015.

31 A. McCloskey, “Why Big Banks May Be At An Annual Fourteen Billion Dollar Disadvantage,” American Banker, October 24, 2013, http://www.americanbanker.com/bankthink/why-big-banks-may-be-at-an-annual-fourteen-billion-dollar- disadvantage-1063111-1.html, accessed November 2015.

32 G. Chon, S. Foxman, “Morgan Stanley is having an identity crisis,” Quartz, July 17, 2013, http://qz.com/83670/morgan- stanley/, accessed February 2016.

33 H. Touryali, “Revealed: Brian Moynihan’s Grand Plan For Bank Of America,” Forbes, May 28, 2014, http://www.forbes.com/sites/halahtouryalai/2014/05/28/revealed-brian-moynihans-grand-plan-for-bank-of-america/, accessed January 2016.

34 Y. Onaran, “Wells Fargo Rides Retail Deposits to Be Most-Valuable Bank,” Bloomberg, December 18, 2014, http://www.bloomberg.com/news/articles/2014-12-18/wells-fargo-rides-retail-deposits-to-become-most-valuable-bank, accessed January 2016.

35 L. Noonan, “Decay of UK Investment Banking leaves smaller clients exposed,” The Financial Times, March 9, 2015, http://www.ft.com/intl/cms/s/0/e8783bee-c433-11e4-9019-00144feab7de.html#axzz3lSHF9z90, accessed February 2016.

36 “HSBC is cutting 50,000 jobs worldwide,” Reuters, June 9, 2015, http://fortune.com/2015/06/09/hsbc-cutting-jobs/, accessed October 2015.

37 J. Strasburg, M. Nissen, “Deutsche Bank to Shrink Workforce by 35,000 in Broad Revamp,” The Wall Street Journal, October 29, 2015, http://www.wsj.com/articles/deutsche-bank-posts-6-6-billion-loss-1446104427?alg=y, accessed January 2016.

38 “China’s banks dominate rankings for profits, strength,” Reuters, June 28, 2015, http://www.reuters.com/article/2015/06/28/banks-strength-survey-idUSL8N0ZA2CX20150628, accessed January 2016.

 

For the exclusive use of D. Perera, 2020.

This document is authorized for use only by David Perera in International Banking taught by MANUEL LASAGA, Florida International University from Jan 2020 to Jul 2020.

 

https://www.chase.com/content/dam/chasecom/en/commercial-bank/documents/mid-market-business-leaders-outlook-2014.pdf
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39 Jamie Dimon’s Letter to Shareholders in JPMorgan Chase’s 2013 Annual Report.

40 G. Hall, “Online lender Upstart raises $35M in Series C funding,” Silicon Valley Techflash, July 16, 2015, http://www.bizjournals.com/sanjose/blog/techflash/2015/07/online-lender-upstart-raises-35m-in-series-c.html, accessed January 2016.

41 Jamie Dimon’s Letter to Shareholders in JPMorgan Chase’s 2013 Annual Report.

42 P. Rudegeair, E. Glazer, R. Simon. “Inside JPMorgan’s Deal with On Deck Capital,” The Wall Street Journal, December 30, 2015, http://www.wsj.com/articles/inside-j-p-morgans-deal-with-on-deck-capital-1451519092, accessed February 2016.

43 Jamie Dimon’s Letter to Shareholders in JPMorgan Chase’s 2013 Annual Report.

44 Interview with Jamie Dimon, February 9, 2016.

45 Jamie Dimon’s Letter to Shareholders in JPMorgan Chase’s 2013 Annual Report.

46 Jamie Dimon’s Letter to Shareholders in JPMorgan Chase’s 2013 Annual Report.

47 K. Tausche, “JPMorgan CFO Bigger Is Better For Now,” CNBC, February 24, 2015, http://www.cnbc.com/2015/02/24/jpmorgan-cfo-bigger-is-betterfor-now.html, accessed November 2015.

48 JPMC Investor Day Presentation Firm Overview, February 24, 2015, p. 8.

49 Interview with Jamie Dimon, February 9, 2016.

50 JPMC Morgan Stanley Financials Conference June 11, 2014 Presentation.

51 JPMorgan Chase & Co Analyst Meeting Transcript, March 6, 2007, Factiva, accessed November 2015.

52 JPMC Morgan Stanley Financials Conference June 11, 2014 Presentation.

53 JPMC Morgan Stanley Financials Conference June 11, 2014 Presentation.

54 R. Ramsden, “New capital rules reignite the JPM breakup debate,” Goldman Sachs Analyst Report, January 5, 2015.

55 JPMorgan Chase 2014 Annual Report.

56 D. Henry & P. Rudegeair, “JPMorgan eyes $1.4 billion in cost savings in 2015,” Reuters, February 25, 2015, http://www.reuters.com/article/us-jpmorgan-outlook-idUSKBN0LS1DW20150225, accessed February 2016.

57 D. Fitzpatrick & R. Sidel, “J.P. Morgan to End Student-Loan Business,” The Wall Street Journal, September 5, 2013, http://www.wsj.com/articles/SB10001424127887323623304579057091084420988, accessed August 2015.

58 JPMorgan Chase 2014 Annual Report.

59 “Global Corporate and Investment Banking: An Agenda For Change,” McKinsey & Company, May 2012, http://www.mckinsey.com/~/media/mckinsey%20offices/india/pdfs/global_corporate_and_investment_banking_an_agen da_for_change.ashx, accessed January 2016.

60 JPMorgan Chase Transcript, May 27, 2015, accessed December 2015.

For the exclusive use of D. Perera, 2020.

This document is authorized for use only by David Perera in International Banking taught by MANUEL LASAGA, Florida International University from Jan 2020 to Jul 2020.

 

http://www.mckinsey.com/%7E/media/mckinsey%20offices/india/pdfs/global_corporate_and_investment_banking_an_agenda_for_change.ashx
http://www.mckinsey.com/%7E/media/mckinsey%20offices/india/pdfs/global_corporate_and_investment_banking_an_agenda_for_change.ashx
  • Structure Bookmarks
    • JPMorgan Chase after the Financial Crisis: What is the optimal scope of the largest bank in the U.S.?
    • Introduction
    • Financial Services Industry
    • How Banks Make Money
    • History
    • Regulatory Reforms and Capital Requirements
    • JPMorgan Chase
    • History
    • Portfolio at end of 2014
    • Pressures to Reduce the Scope of JPMorgan Chase
    • Capital Cost Penalty
    • External Pressures
    • Competitors’ Strategies
    • Demonstrating the Value of the Universal Banking Model
    • Stakeholder Benefits
    • Synergies
    • Execution to Capture Synergies
    • Business Simplification
    • Balance Sheet Optimization
    • Non-Operating Deposits
    • Conclusion
    • Exhibit 1Stock Price Performance (2006 – 2015)
    • Exhibit 2JPMorgan Chase Income Statement
    • Exhibit 3JPMorgan Chase Balance Sheet
    • Exhibit 4aRevenue Components of Banks
    • Exhibit 4b2014 Composition of Global Banking Revenue and Profits ($ billion)
    • Exhibit 5Global Banking Industry Return On Equity 2000-2014 (%)
    • Exhibit 6Basel III Proposals
    • Exhibit 7JPMorgan Chase Capital Constraints & Requirements vs. Peers in 2014
    • Exhibit 8JPMC Segment Financials
    • Exhibit 9Market Position of JPMorgan Chase Businesses 2014 vs. 2006
    • Exhibit 10JPMorgan Chase vs. Competitors in Cost Efficiency and Returns
    • Exhibit 11Non Interest Revenue (NIR) Volatility vs. Peers (2010 – 2014)
    • Exhibit 12Separation Scenario into Chase and JPMorgan
    • Exhibit 13aJPMorgan Chase Revenue and Cost Synergies Generate $6-7 billion in Net Income
    • Exhibit 13bJPMorgan Chase Cost and Revenue Synergies
    • Exhibit 14JPMorgan Chase Business Simplification Initiatives
    • Endnotes
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