J.P. Morgan Exceeds Fed Minimum Capital Level Under Stress Scenario
June 23 2016 - 5:28PM
Dow Jones News
By Emily Glazer
J.P. Morgan Chase & Co. has the capital to keep lending in a
severe economic downturn, the Federal Reserve calculated Thursday
in the first stage of its annual stress tests.
At the low point of a hypothetical recession, J.P. Morgan's
common equity Tier 1 ratio, which is a measure of high-quality
capital as a share of risk-weighted assets, was 8.3%, exceeding the
4.5% level the Fed views as a minimum, the central bank
estimated.
J.P. Morgan's Tier 1 leverage ratio, which measures high-quality
capital as a share of all assets, was 6.2%, exceeding a 4%
minimum.
The stress tests simulate a worldwide recession. The results
were under the Fed's "severely adverse" scenario of financial
stress, which this year included a 10% U.S. unemployment rate,
significant losses in corporate and commercial real estate lending
portfolios, and negative rates on short-term U.S. Treasury
securities.
The results will factor into the Fed's decision next week about
whether to approve the bank's plan for rewarding shareholders with
dividends or potential share buybacks. Banks whose capital ratios
dropped close to minimum levels may choose to scale back their
dividend or buyback plans before the Fed announces its final
decision Wednesday. That day the banks can choose to announce
whether they are raising their dividends or buying back more
shares, important for enhancing shareholder returns.
J.P. Morgan, the largest U.S. bank by assets, has been shrinking
over the past year in efforts to become simpler and less sprawling
as new capital regulations are set to roll out in coming years.
That has, in part, allowed the bank to boost its quarterly
dividend. One notable point in this year's result: J.P. Morgan's
pre-provision net revenue jumped to $64.9 billion in this year's
test, more than double the $30.4 billion in last year's
results.
J.P. Morgan passed the stress test over the past five years,
though in 2013 it got a "conditional" approval due to "weaknesses
in its capital plan or capital planning process," the Fed said at
the time. It resubmitted its capital plan to the Fed later that
year.
Both of J.P. Morgan's key ratios were substantially higher than
last year, when the Fed calculated that the bank would have a
common equity Tier 1 capital ratio of 6.3% and a Tier 1 leverage
ratio of 4.6% at the low point of a recession.
Last year, J.P. Morgan adjusted its capital plan to the Fed in
the week between the two results, giving it more room to past the
second test.
The bank leverages around 3,000 employees across the firm to
work on these stress tests, including weekly senior-level steering
committees related to the exercises.
Write to Emily Glazer at emily.glazer@wsj.com
(END) Dow Jones Newswires
June 23, 2016 17:13 ET (21:13 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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