Dear Fellow Shareholders,

Jamie Dimon,
Chairman and
Chief Executive Officer

Seven years ago, the world was shaken by the global financial crisis. And since then,
our company has been dealing with extraordinary challenges as a result of that crisis.
We have endured an unprecedented economic, political and social storm the impact
of which will continue to be felt for years and possibly decades to come. What is
most striking to me, in spite of all the turmoil, is that our company became safer and
stronger and it never stopped supporting clients, communities and the growth of
economies around the world.
I feel extraordinarily privileged to work for this great company with such talented
people. Our management team and our employees do outstanding work every single
day sometimes under enormous pressure while dealing with an extreme number
of complex business and regulatory issues. The way our people and our firm are
able to address our challenges and admit our mistakes while continuing to grow our
businesses and support our clients fills me with pride.

Our company earned a record $21.8 billion in net income on revenue1 of $97.9 billion in
2014. In fact, we have delivered record results in the last four out of five years, and we
hope to continue to deliver in the future. Our financial results reflected strong underlying
performance across our businesses. Over the course of last year, our four franchises
maintained and even strengthened our leadership positions and continued to gain
market share, improve customer satisfaction and foster innovation. We also continued
to deliver on our many commitments including business simplification, regulatory
requirements, controls, expense discipline and capital requirements.

Earnings and Diluted Earnings per Share

20042014
($ in billions, except diluted EPS)

$21.8

$21.3
$19.0

$17.9

$17.4
$14.4

$15.4

$11.7

$8.5

$4.00

$4.33
$5.6

$2.35

$4.5
$1.52
2004

$5.20

$5.29

$4.48

$4.35

$3.96

$2.26

$1.35
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Net income Diluted EPS

Tangible Book Value per Share

20042014

$44.69
$38.75
$27.09

$15.35

$16.45

2004

2005

$18.88

2006

$21.96

$22.52

2007

2008

2009

$30.18

2010

$40.81

$33.69

2011

2012

2013

2014

Represents managed revenue

Bank One/JPMorgan Chase & Co. tangible book value per share performance vs. S&P 500
Bank One
(A)

S&P 500
(B)

Relative Results
(A) (B)

Performance since becoming CEO of Bank One

(3/27/200012/31/2014)(a):

Compounded annual gain

Overall gain

12.7%

5.3%

7.4%

434.9%

105.1%

329.8%

JPMorgan Chase & Co.

(A)

S&P 500
(B)

Relative Results
(A) (B)

Performance since the Bank One

and JPMorgan Chase & Co. merger
(7/1/200412/31/2014):

Compounded annual gain

Overall gain

14.1%

8.0%

6.1%

300.5%

124.5%

176.0%

Tangible book value over time captures the companys use of capital, balance sheet and profitability. In this chart, we are looking at
heritage Bank One shareholders and JPMorgan Chase & Co. shareholders. The chart shows the increase in tangible book value per share;
it is an aftertax number assuming all dividends were retained vs. the S&P 500 (a pretax number with dividends reinvested).
(a)

On March 27, 2000, Jamie Dimon was hired as CEO of Bank One

We believe that, in 2014, we continued to deliver for our shareholders. The table above
shows the growth in tangible book value per share, which we believe is a conservative
measure of value. You can see that the tangible book value per share has grown far
more than the Standard & Poors 500 Index (S&P 500) in both time periods. For Bank
One shareholders since March 27, 2000, the stock has performed far better than most
financial companies and the S&P 500. And since the JPMorgan Chase & Co. merger with
Bank One on July 1, 2004, we have performed well versus other financial companies
and slightly below the S&P 500. The details are shown in the table below.

Stock total return analysis

Bank One

S&P 500

S&P Financials Index

Performance since becoming CEO of Bank One

(3/27/200012/31/2014)(a):

Compounded annual gain

Overall gain

10.4%

4.0%

2.2%

328.3%

78.8%

37.4%

JPMorgan Chase & Co.

S&P 500

S&P Financials Index

7.5%

8.0%

0.9%

113.3%

124.5%

9.5%

Performance since the Bank One

and JPMorgan Chase & Co. merger
(7/1/200412/31/2014):

Compounded annual gain

Overall gain

This chart shows actual returns of the stock, with dividends included, for heritage shareholders of Bank One and JPMorgan Chase & Co.
vs. the Standard & Poors 500 Index (S&P 500) and the Standard & Poors Financials Index (S&P Financials Index).
(a)

On March 27, 2000, Jamie Dimon was hired as CEO of Bank One

However, our stock performance has not been particularly good in the last five years.
While the business franchise has become stronger, I believe that legal and regulatory
costs and future uncertainty regarding legal and regulatory costs have hurt our
company and the value of our stock and have led to a price/earnings ratio lower
than some of our competitors. We are determined to limit (we can never completely
eliminate them) our legal costs over time, and as we do, we expect that the strength
and quality of the underlying business will shine through.
JPMorgan Chase continued to support consumers and businesses and make a
significant positive impact on our communities. In 2014, the firm provided credit
and raised capital of more than $2.1 trillion for our clients. The firm also has hired
nearly 8,700 military veterans since 2011 as a proud founding member of the 100,000
Jobs Mission, which recently has increased the goal to 300,000 jobs. Our firm was
there to help small businesses we provided $19 billion of credit to U.S. small
businesses, which allowed them to develop new products, expand operations and
hire more workers. In total, we provided $197 billion of credit to consumers. And
we provided credit and raised capital of more than $75 billion for nonprofit and
government entities, including states, municipalities, hospitals and universities.
Our strength allows us to be there for our clients and communities in good times
and, more important, in bad times. In the face of many difficult challenges, we never
stopped doing our job, and we demonstrated that the work we do matters. And we also
continue to build our business by investing in infrastructure, systems, technology and
new products and by adding bankers and branches around the world.
New and Renewed Credit and Capital for Clients
at December 31,

Corporate clients
($ in trillions)

Consumer and Commercial Banking

($ in billions)
Year-over-year change

$556
$474

$1.5

$18

$20

$1.6
$17

$1.4

$583

$82

$92

11 to 12 12 to 13 13 to 14

$523

Small business
$108

$1.3
$91

$122

$131

$110

$185
$141

$165

$100
$127
$156

$191

Corporate clients

(9)%

20%

7%

$19

18%

(8)%

5%

(10)%

12%

18%

Commercial/
Middle market

11%

8%

41%

Asset
management

41%

17%

(23)%

Mortgage/
Home equity

22%

(7)%

(53)%

Total Consumer and 17%

Commercial Banking

5%

(10)%

Card & Auto

$177
$84

2011

2012

2013

2014

2011

2012

2013

2014
5

Our clients also exhibit their faith in us by entrusting us to take care of their money
either as deposits or as client assets entrusted to us as shown in the chart below.
Assets Entrusted to Us by Our Clients

Assets
Entrusted
to Us by Our Clients
at December
31,
at December 31,

Deposits and client assets

($ in billions)

Year-over-year change

$3,822
$3,438
$3,163

$464

$439
$824

$398

11 to 12 12 to 13 13 to 14

$3,973
$503
$861

Deposits
Consumer

10%

6%

8%

Wholesale

3%

9%

4%

10%

13%

3%

$755
$730

$2,035

2011

Client assets(a)

$2,244

2012

$2,534

$2,609

2013

2014

Assets under custody(b)

($ in billions)
$16,870

$18,835

$20,485

(a)

Represent assets under management as

well as custody, brokerage, administration
and deposit accounts

(b)

Represents activities associated with the

safekeeping and servicing of assets

$20,549

In this letter, I will discuss the issues highlighted below. I also encourage you to read
the letters written by several of our business leaders about our main businesses, our
critical operations and controls, and some of our corporate responsibility efforts.
As usual, this letter will describe some of our successes and opportunities, as well as
our challenges and issues. The main sections of the letter are as follows:
I.

We have an outstanding franchise our company has emerged as an endgame

winner, but we need to earn it every day

II. We build for the long term we manage through-the-cycle, and we always are
prepared for the toughest of times
III. We will successfully navigate the new global financial architecture (and we are
well on our way to having fortress controls)
IV. We have a solid strategy and believe our future outlook is very good but, as
usual, there still are a lot of things to think and worry about
V.

We have a fully engaged board, an exceptional management team and a strong

corporate culture

I. W E H AV E A N OUTSTA N DI N G F R A N C HI S E OUR
COM PA N Y H AS E ME R G E D A S A N E N DG A ME WI N N E R,
BUT W E N E E D TO E A R N I T EV E RY DAY

If you think back 10, 20 or 30 years ago, my

predecessors and I struggled to try to build
a great company, which we hoped would
emerge as an endgame winner. The ultimate
outcome was unclear and many competitors
did not survive (this is true for most largescale consolidating industries). Even for those
of us that did, it was quite a struggle. Today,
it is clear that our company is an endgame
winner both in the United States and globally which is invaluable in any industry. And
while we have had some difficult times since
the financial crisis, the power of the franchise
has shown through. We also know that future
success is not guaranteed only consistently
good management over a long period of time
can ensure long-term success in any business.
But we certainly are in a very good place.

We have delivered good multi-year financial

results (strong margins and returns and
low volatility) and have shown a great
ability to adapt to changes both from the
marketplace and the regulatory environment
We always compare our margins and returns
with those of our best competitors in each
business. The chart below, which is very
similar to a chart we showed at our Investor
Day, shows some of these numbers for 2014.
We believe that the right discipline is to
compare each of our businesses against its
best competitor. It is a mistake just to look
at the consolidated numbers and compare
them every company has a different mix of
businesses. The chart below also shows how
our businesses compare in terms of margins,

JPMorgan Chase Is in Line with Best-in-Class Peers in Both Efficiency and Returns
Efficiency

Consumer &
Community
Banking
Corporate &
Investment
Bank

JPM 2014
overhead
ratios

Best-in-class
peer overhead
ratios2 weighted
by JPM
revenue mix

JPM target
overhead
ratios

58%

55%

~50%

JPM 2014
ROE

Best-in-class
peer ROTCE4
weighted by
JPM equity mix

JPM target
ROE

18%

16%

20%

WFC

62%1

60%

WFC

55%-60%

13%1

Citi

Commercial
Banking

39%

Asset
Management

71%

JPMorgan Chase

Returns

38%

35%

18%

59%1

13%

18%

PNC

70%

23%

UBS WM & BLK

60%1

13%

Citi

PNC

69%

14%

27%

25%+

BEN

55%+/-

13%3

13%

~15%3

Excludes legal expense

Best-in-class overhead ratio represents implied expenses of comparable peer segments weighted by JPMorgan Chase (JPM) revenue: Wells Fargo
Community Banking (WFC), Citi Institutional Clients Group (Citi), PNC Corporate and Institutional Banking (PNC), UBS Wealth Management and
Wealth Management Americas (UBS WM) and BlackRock (BLK), and JPM Corporate segment
3
Represents ROTCE for total JPMorgan Chase. Goodwill is primarily related to the Bank One merger and prior acquisitions and is predominantly
retained by Corporate
4
Best-in-class ROTCE represents implied net income minus preferred stock dividends of comparable peers weighted by JPM tangible common equity:
WFC, Citi, PNC, Franklin Templeton (BEN) and JPM Corporate segment
2

I. AN O U TSTA N D I N G F R A N C HI S E

our target margins in a normal environment

and, most important, our return on equity
(ROE). On most of these measures, we are
very close to the best-in-class competitor.
A good company should be able to earn
competitive margins over an extended period
of time regardless of economic conditions while
investing and without taking excessive risk

Any company can improve earnings in the

short run by taking on additional risk or
cutting back on investments. Any company
can grow rapidly if it takes on too much
risk but that usually is the kind of growth
one comes to regret. Our margins have been
quite good, even as we have been investing
for the long run. These investment expenses
lower our short-term returns, but they
are good expenses. In addition to the
tremendous amount that we invest annually in technology and infrastructure, some
examples of where we have invested over
the past five years are:
448 retail branches in the United States
28 wholesale offices abroad
2,498 Chase Private Client locations/
branches, supported by 594 new Private
Client advisors
20 Commercial Banking expansion cities,
including approximately 350 Commercial
Banking bankers
205 small business bankers
A good company always should be investing
while it also is waste cutting; i.e., cutting
out any unnecessary expenses. However,
I often have received bad advice on what
are unnecessary expenses. For example,
spending on important strategic off-sites,
research and development for innovation,
marketing that has a positive return those
are good expenses. We take a bus trip annually to visit branches, operating centers
and clients. It is both fun and enormously
productive and it is not an unnecessary
expense it makes us a better company.

Even our annual Retail National Sales

Conference with the top 5% of our branch
bankers, loan officers and tellers is critical
we spend time working together, we learn
a lot and we get to thank these outstanding
employees at an awards recognition dinner.
While it is perfectly reasonable in tough
times to dramatically reduce the cost of that
conference, it is unwise to cancel it. I have
been to every single one of these events since
I started running Bank One, and I intend to
continue that tradition.
We earned adequate returns while building an
increasingly stronger capital base

During these challenging years, our company

has confronted difficult markets, billions of
dollars of additional regulatory costs, billions
of dollars of costs due to changes in products and services, and, unfortunately, very
high legal costs. And we have had to hold
an increasing amount of capital throughout
this time. While there is no question that
these events did reduce our performance and
returns, we have been able to adapt, meet the
new rules and perform fairly well financially.

I. AN OUTSTANDING F RA N C H ISE

The chart below shows earnings, the capital

we returned to shareholders through dividends and stock buybacks, our returns
on tangible common equity and our high
quality liquid assets (HQLA). High quality
liquid assets essentially are deposits held
at the Federal Reserve and central banks,
agency mortgage-backed securities and
Treasuries, and they are the component
of our balance sheet that has grown most
dramatically. Only HQLA count for liquid
assets under banking regulators definition of
liquidity and we currently have more than
is required by the regulators.

The chart below also shows that even

after dramatically increasing capital and
liquidity, both of which reduce returns on
capital, we were able to earn an adequate
return on tangible common equity, grow
our capital base as needed and still return
capital to shareholders.

Capital, Liquidity, Returns

($ in billions, except ratios)
Basel III common equity Tier 1 capital ratio (CET1)1
Glidepath3

11.0%
9.5%

11.5%

12.0%+

10.2%

8.7%
7.9%
7.0%

2010

2011

2012

2013

2014

$ 17

$ 19

$ 21

$ 18

$ 22

13

10

11

HQLA

NA

NA

341

522

600

ROTCE

15%

15%

Earnings
Total capital returned2

15%

11%

2015

2016

2017+

13%

Basel III rules became effective on January 1, 2014. The ratios presented for 2010-2014 are calculated under the Basel III Advanced Fully
Phased-In Approach and, for 2010-2013, reflect the firms best estimate based on its understanding of the rules in the relevant period
2
Represents common dividends plus stock buybacks, which are gross of employee issuance
3
Reflects the firms Basel III CET1 ratio glidepath for 2015-2017+

I. AN O U TSTA N D I N G F R A N C HI S E

Leading Client Franchises

Building exceptional client franchises
We have built our client franchises over time with substantial share gains and opportunity for more

2006

2014

Consumer &
Community
Banking

Deposits market share

# of top 50 Chase markets where we are #1
(top 3) deposits
Card sales market share
Merchant processing volume

3.6%1

11 (25)
16%2
#33

7.5%

15 (40)
21%2
#14

Relationships with ~50% of U.S. households

#
 1 customer satisfaction among largest U.S. banks
for the third consecutive year14
#1 primary banking relationship share in Chase footprint15
#1 U.S. credit card issuer based on loans outstanding2
~50% of U.S. e-Commerce volume16

Corporate &
Investment
Bank

Global Investment Banking fees5

Market share5
Total Markets6,7
Market share6,7
FICC6,7
Market share6,7
Equities6,7
Market share6,7

#2
8.6%
#8
7.9%
#7
9.1%
#8
6.0%

#1
8.1%
#1
16.2%
#1
18.6%
#3
11.5%

>80% of Fortune 500 companies do business with us

Top 3 in 15 product categories out of 1617
#1 in both U.S. and EMEA Investment Banking fees18
#1 in Global debt, equity and equity-related18
#1 in Global long-term debt and Loan syndications18
Top 3 Custodian globally with AUC of $20.5 trillion
#1 USD clearinghouse with 19.2% share in 201419

Commercial
Banking

# of states with Middle Market banking presence

# of states with top 3 Middle Market banking
market share8
Multifamily lending9
Gross Investment Banking revenue ($ in billions)
% of North America Investment Banking fees

22

6
#28
$0.7
16%

30

10
#1
$2.0
35%

Average loans grew by 13% CAGR 2006-201420

Industry-leading credit performance TTC 8 consecutive
quarters of net recoveries or single-digit NCO rate
Leveraging the firms platform average ~9 products/client

Asset
Management

Global active long-term open-end mutual fund

AUM flows10
AUM market share10
Overall Global Private Bank (Euromoney)
Client assets market share11
U.S. Hedge Fund Manager (Absolute Return)12
AUM market share12

#2
1.8%
#5
~1%
#1113
1.4%

#1
2.5%
#1
~2%
#2

3.4%

84% of 10-year long-term mutual fund AUM in top 2

quartiles21
23 consecutive quarters of positive long-term AUM flows
Revenue growth >70% and long-term AUM growth >80%
since 2006
Doubled Global Wealth Management client assets
(2x industry rate) since 200622

For footnoted information, refer to slides 11 and 50 in the 2015 Firm Overview Investor Day presentation, which is available on JPMorgan Chase & Co.s website at
(http://investor.shareholder.com/jpmorganchase/presentations.cfm), under the heading Investor Relations, Investor Presentations, JPMorgan Chase 2015 Investor Day,
Firm Overview, and on Form 8-K as furnished to the SEC on February 24, 2015, which is available on the SECs website (www.sec.gov). Further, for footnote 20,
CAGR represents compound annual growth rate

Our businesses have been able to gain market

share, which only happens when we are
creating happy clients
Importantly, much of the growth has been
organic. Please review some of the numbers in
the chart above they speak for themselves.
If you had asked me back in 2006 if we could
have accomplished those kinds of market
share numbers, I would have been skeptical.
And, fortunately, we have plenty of areas
where we still can grow or do better I will
talk about this in a later section of this letter.
Most of our businesses have exhibited improving
customer satisfaction

The chart on the next page shows the great

progress that our Consumer Bank has made
in improving satisfaction scores. In fact,
10

American Customer Satisfaction Index

named Chase #1 in customer satisfaction
among large banks in 2014. We have received
even better scores than most of the regional
banks and essentially are equal in ranking to
the midsized banks. (We still are not satisfied, however, and want to be even better.)
We believe that our customer satisfaction
has been going up for multiple reasons: error
rate reduction, better products and services,
good old-fashioned service with a smile, and,
importantly, innovations like deposit-friendly
ATMs and continual improvement in online
and mobile banking services. While the chart
shows satisfaction in the Consumer Bank, we
also have had increasing customer satisfaction scores in our small business, mortgage,
auto finance and credit card franchises.

I. AN OUTSTANDING F RA N C H ISE

Consumer Satisfaction Score: 2010-2014 1

 Chase
 Big banks

2010

 Industry average
 Regional banks  Midsized banks

2011

2012

2013

2014

Source: J.D. Power U.S. Retail Banking Satisfaction Study; Big Banks defined as Chase, Bank of America,
Wells Fargo, Citibank, U.S. Bank, PNC Bank

Our mix of businesses works for clients and

for shareholders
All companies, including banks, have a
slightly different mix of businesses, products
and services. The most critical question is,
Does what you do work for clients? Our
franchise does work for clients by virtue of
the fact that we are gaining share in each of
our businesses, and it works for shareholders
by virtue of the fact that we are earning
decent returns and some of our competitors are not.
Other considerations are whether your
company has moats is it protected in
some way from debilitating competition or
events? And has it performed consistently
in good times and in bad? We believe that
we have well-fortified moats in the form of
economies of scale, brand, expertise, technology and operations, and importantly
competitive advantages created by our ability
to cross sell (more on this later in this letter).
In addition, we have performed fairly consistently in good times and in bad. Even in
2008, the worst year in perhaps 75 years for
financial companies, we earned 6% return
on common tangible equity not great but

not bad, all things considered. Additionally,

we have embedded strengths that are hard to
replicate the knowledge and cohesiveness
of our people, our long-standing client relationships, our technology and product capabilities, our fortress balance sheet and our
global presence in more than 100 countries.
Our mix of businesses leads to effective cross
sell and substantial competitive advantages.
We are not a conglomerate of separate,
unrelated businesses we are an operating
company providing financial services to
consumers, companies and communities
A conglomerate is a group of unrelated businesses held under one umbrella holding
company. There is nothing wrong with
a conglomerate, but we are not that. In
our case, whether you are an individual, a
company (large or small) or a government,
when you walk in the front door and talk
with our bankers, we provide you with essential financial products, services and advice.
We have a broad product offering and some
distinct capabilities, which, combined, create
a mix of businesses that works well for each
of our client segments.
11

I. AN O U TSTA N D I N G F R A N C HI S E

Part of our mix of businesses, however, is

not unique. While we divide our company
into four distinct businesses, the truth
is that many regional banks do a lot of
what three of our four businesses do (i.e.,
Chase Consumer & Community Banking,
Commercial Banking and Asset Management). The biggest difference between us
and regional banks is our global Corporate & Investment Bank (and the non-U.S.
part of our Asset Management business).

We market Chase Paymentech, our

merchant acquirer, through our branches
to small businesses, through the Commercial Bank to midsized companies and
through our Corporate & Investment Bank
to large, multinational corporations.

Our broad product set and some of our

unique capabilities (some we inherited,
and some we built carefully over time),
combined with effective cross sell, create
substantial competitive advantage. The
examples below make some of those
advantages clear:

Americas financial system still is the best

the world has ever seen, and it includes not
just banks but asset managers, private equity,
venture capital, individual and corporate
investors, non-bank financial companies,
and public and private markets. In fact, in
the United States, banks are a much smaller
part of the financial system and the economy
than in most other countries. And there is a
great need for the services of all banks, from
large global banks to smaller regional and
community banks.

Commercial Banking now generates

35% of our U.S. investment banking
business. This means we are able to
bring JPMorgan Chases exceptional
Investment Bank to serve hundreds
of midsized corporations and institutions with the best global investment
banking products and services in the
industry. We can do this because our
Commercial Bank is in hundreds of
towns across the country where we can
serve clients locally person to person
and also bring the best of JPMorgan
Chase to them.
Around the world, we can bring exceptional private banking services to CEOs
and company owners or help private
banking clients with their global
commercial banking needs.
Because of our international footprint,
we bring global banking services
from cash management to M&A to
approximately 2,500 of our more than
20,000 Corporate Client Banking and
Middle Market Banking clients, who
are rapidly expanding overseas and
who need these services from someone
they know and can trust.

12

Americas financial system is still the best the

world has ever seen it is large and diverse
and it serves the best economy the world
has ever seen, which also is large and diverse

Our large global Corporate & Investment Bank

does things that regional and community banks
simply cannot do. We offer unique capabili-

ties to large corporations, large investors and

governments, including federal institutions,
states and cities. For example, we provide
extensive credit lines or raise capital for these
clients, often in multiple jurisdictions and in
multiple currencies. We essentially manage
the checking accounts for these large institutions, often in many different countries.
On the average day, JPMorgan Chase moves
approximately $6 trillion for these types of
institutions. On the average day, we raise or
lend $6 billion for these institutions. On the
average day, we buy or sell approximately
$800 billion of securities to serve investors
and issuers. In 2014, our Corporate & Investment Bank raised $61 billion for states, cities,
governments and universities, including
funds to renovate the historic Arthur Ashe
(Tennis) Stadium in New York City, revenue

I. AN OUTSTANDING F RA N C H ISE

bonds to assist municipalities and hospitals,

and green bonds to finance environmentally
beneficial projects such as green buildings,
clean water and renewable energy. As a firm,
we spend approximately $700 million a year
on research so that we can educate investors,
institutions and governments about economies, markets and companies. The needs of
these clients will be met one way or another
by large financial institutions that can bear
the costs and risks involved. Simply put, if
it is not done by a large American financial
institution, it will be done by a large nonAmerican financial institution.
Regional and community banks are critical
to their communities in fact, we are a huge
supporter and their largest banking partner.

These banks are deeply embedded in their

communities, many of which are not served
by larger banks. They have an intimate
knowledge of the local economy and local
small businesses, which allows them to costeffectively serve those clients. JPMorgan
Chase, as a traditional money center bank
and bankers bank, in fact, is the largest
banker in America to regional and community banks. We provide them with many
services so they can continue to serve their
clients. For example, we directly lend to
them, we process payments for them, we
finance some of their mortgage activities, we
raise capital for them (both debt and equity),
we advise them on acquisitions, and we buy
and sell securities for them. We also provide
them with interest rate swaps and foreign
exchange both for themselves to help them
hedge some of their exposures and for
their clients.
However, large does not necessarily mean
complex (and things should be complex only
for a good reason)
Many of the activities we do that are considered large are easy to understand. All of our
5,600 Chase consumer branches do essentially the same thing, and many of our large
global transactions are not any more complicated than a loan for a middle market client.

While we agree with the concept that you

should keep things as simple as possible,
some things, by their very nature, are more
complex. And that complexity cannot be
reduced by wishful thinking. In fact, basic
lending, whether to a large company or
a midsized company, is one of the more
complex things we do because one must
understand the economy, the nature of
the business and often the types of collateral involved. There are many judgmental
factors to consider as well, which might
include the character of the borrower, the
growth prospects of the business, and an
understanding of the products and services
and technology of the business.
There are understandable questions about
the role that large financial institutions
play. Some of these questions make people
nervous, in part because they do not understand the larger picture. These are important
questions, and we always are willing to help
explain what we do and why we do it. Taken
in small component pieces, these activities
generally are easier to understand. While
some may criticize a banks activities instead
of taking the time to understand them, this
does not contribute to a genuinely constructive dialogue around the role of banks.
People also should ask themselves one
basic question: Why do banks offer these
services? The fact is, almost everything we
do is because clients want and need our
various and sometimes complex services.
(We do many activities that are ancillary to
clients direct needs, but we must do these
things to provide clients with what they
need. For example, in order to support our
operation, we run global data centers, we
hedge our own exposures and we maintain
liquid pools of investments.)
I would venture to say that banking is not
as complex as making airplanes, discovering
effective pharmaceuticals, building safe
cars, developing innovative electronics and,
of course, understanding nuclear physics.
There are huge benefits to the complexity
involved in those other industries but there
also are sometimes negative consequences.
The question for society is: Are we, in total,
13

I. AN O U TSTA N D I N G F R A N C HI S E

better off or worse off because of some of the

great products and services that come with
complexity? The answer in our opinion is a
resounding yes, though you should always
strive to minimize the risks. But we want to
acknowledge that the difference with banks,
as pointed out by critics, is that if and when
they make mistakes, they can severely harm
the economy. This concern is legitimate, and I
will talk about it in a later section.
Larger does not necessarily mean more risky
For example, many large banks had no
problem navigating the financial crisis,
while many smaller banks went bankrupt.
Many of these smaller banks went bankrupt
because they were undiversified, meaning
that most of their lending took place in a
specific geography. A good example was
when oil collapsed in the late 1980s. Texas
banks went bankrupt because of their direct
exposure to oil companies and also because
of their exposure to real estate whose value
depended largely on the success of the oil
business. Since the crisis began seven years
ago, more than 500 smaller banks have gone
bankrupt, and JPMorgan Chase has contributed approximately $8 billion to the Federal
Deposit Insurance Corporation to help pay
for the resolution of those banks.
And, yes, there are both costs and benefits to
size and complexity
The benefits of size are obvious: huge economies of scale, the ability to serve large clients
and make large investments, and safe diversification, among others. And, yes, there sometimes are clear negatives to size usually in
the form of arrogance, greed, complacency
or lack of attention to detail. (There also are
many small businesses inflicted with these
diseases they kill companies both large
and small.) Good companies get the benefits
of size and continuously are fighting off the
negatives. And there are lots of winners and
losers, particularly as industries consolidate.
In every industry, you will see companies
that benefit from size and those that dont.

14

Our size and strength allow us to create

benefits for society by helping economies
and communities around the world grow and
prosper
We are able to do our part in supporting
communities and economies around the
world because we are strong, stable and
permanent. And because of this strength
and stability, we can continue to support our
clients in good times and, more important,
in the toughest of times. The most important
thing we can do is keep our company healthy
and vibrant so that we can serve the needs
of customers, consumers and businesses and
help local economies and the thousands of
cities and various communities around the
world where we operate to grow and prosper.
In addition, we strongly believe in being a
good corporate citizen. We are one of the
most philanthropic companies in the world
(we give away more than $200 million a
year), but we are able to do much more than
provide money. We bring the skills, resources
and global knowledge of our entire firm
to support the economic growth and progress of communities across the globe. One
example is our research, such as studying
how our communities analyze labor market
conditions so they can get better at training
people for jobs or how cities can further
develop their economies. See Peter Schers
Corporate Responsibility letter on page 58
for more details on our efforts to support
cities and communities around the globe.
Following are three unique initiatives that
wed like to focus on:
JPMorgan Chase Institute. We will be offi-

cially launching an exciting new initiative

called the JPMorgan Chase Institute, which
is a global think tank dedicated to delivering data-rich analyses, expert insights
and thought leadership for the public good.
Drawing on the knowledge, market access,
broad relationships and resources across
the firm, the JPMorgan Chase Institute will
help inform both business and policy decisions by grounding them with facts, data
and thoughtful analysis. Our aim is to help
decision makers policymakers, businesses
and nonprofit leaders appreciate the scale,

I. AN OUTSTANDING F RA N C H ISE

granularity, diversity and interconnectedness of the global economic system to inform

smarter decisions and good policies that
advance global prosperity for consumers,
businesses and countries. The research
agenda will include groundbreaking analytic
work on the financial behavior of individuals, insights on the small business sector,
and expert profiling of global trade and
capital flows.
Detroit. We brought all of our resources to

bear in a special, coordinated way, which we

never have done before, to try to help the
city of Detroit. We have been doing business
there for more than 80 years and already
are the largest consumer, commercial and
investment bank serving Detroits consumers
and companies. But we wanted to do more
to help kick-start the citys recovery. This
effort is a $100 million commitment, which
includes investments, philanthropy and
our people working in tandem with a set
of city leaders who have come together to
work toward a common purpose. Our initial
interest in undertaking this effort was made
possible because of our faith in the extraordinary work and talent of Mayor Duggan and
Gov. Snyder (and Kevyn Orr, who recently
left as Emergency Manager). Their dedication to coherently, comprehensively and
pragmatically attacking the citys enormous
problems made us want to do more. In fact,
everything we have done to help is the result
of asking a broad array of the citys leaders
what they really needed and then working
with them to come up with some creative
solutions. Let me give just a few examples:
We expanded the citys effort to systematically map every single parcel in Detroit
and provided the technology assistance
so that residents can use their phones to
continually update the database.
We helped provide financing for people
who wanted to purchase land or to buy
and renovate homes.

We supported nonprofit organizations,

including Focus: HOPE, in their efforts to
help people gain skills from job training
programs.
We helped small businesses get access to
the advice, training and other resources
needed to grow, including a new commercial kitchen at Eastern Market that will
allow more food businesses to expand.
We provided lending for development
both commercial development to let
businesses like Global Titanium expand
jobs and residential development and new
construction of apartment buildings in
Detroits urban core and neighborhoods.
We created the Detroit Service Corps to
bring more than 50 of our top managers
to work full time with Detroit nonprofits
to help them analyze challenges, solve
problems and give them the best chance
for success.
Helping Detroits economy recover and
thrive would be a shining example of American resilience and ingenuity at work.
Military and veterans. Another effort that we

want you to know about is what JPMorgan

Chase has done to help position military
members, veterans and their families for
success in their post-service lives through
employment, housing and educational
programs. In 2011, JPMorgan Chase and 10
other companies launched the 100,000 Jobs
Mission, setting a goal of collectively hiring
100,000 veterans. The 100,000 Jobs Mission
now includes more than 190 companies that
have collectively hired more than 217,000
veterans since 2011 and has pledged to
hire a total of 300,000 veterans. JPMorgan
Chase hired over 1,800 veterans in 2014,
nearly a 40% year-over-year increase, for a
total of nearly 8,700 veterans hired since
2011. Further, we expanded our employment programs to address the unique needs
of women veterans and military spouses.
We hope that this makes you as proud of
JPMorgan Chase as it does for all of us.

15

II. WE B U IL D FO R T H E LON G T E R M WE MA N AG E
TH RO U GH -T H E - CYC LE , A N D W E A LWAYS A R E
P REPARED FO R T H E TOUG H E ST OF T I ME S

Our paramount responsibility to society and

to our clients is to be there in good times and
bad times
We have a huge obligation to society not
only must we never fail, but we need to be
steadfast. Never failing means having the
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.
Steadfast means that you will be there no
matter what happens, and being there means
that you can continue to properly serve your
clients even in tough times. In the toughest
of times, it is not about making a profit.
It is about helping your clients survive. I
should point out that in the toughest of
times, particularly in 2009, JPMorgan Chase
rolled over and extended credit to small
and medium-sized businesses a total of $63
billion, to governments and nonprofits a
total of $110 billion, and to large corporations
a total of $1.1 trillion. I will talk more about
this later.
We extensively manage our risks so that
we can survive in any scenario. The Federal
Reserves stress test is a tough measure of
our survival capability though our ability to
survive is stronger than that test implies
We are fanatics about stress testing and risk
management. It is in our best interest to

protect this company for the sake of our

shareholders, clients, employees and communities. If you went to our risk committee
meetings, you would see a number of professionals working to thoughtfully manage and
reduce our risk we dont want a bunch
of cowboys trying to increase it. We run
hundreds of stress tests a week, across our
global credit and trading operations, to
ensure our ability to withstand and survive
many bad scenarios. These scenarios include
events like what happened in 2008, other
16

historically damaging events and also new

situations that might occur. Our stress tests
include analyzing extremely bad outcomes
relating to the Eurozone, Russia and the
Middle East.
Regarding the Eurozone, we must be prepared
for a potential exit by Greece. We continually stress test our company for possible
repercussions resulting from such an event
(even though, in our opinion, after the initial
turmoil, it is quite possible that it would
prompt greater structural reform efforts by
countries that remain). Also regarding geopolitical crises, one of our firms great thinkers,
Michael Cembalest, reviewed all of the major
geopolitical crises going back to the Korean
War, which included multiple crises involving
the Soviet Union and countries in the Middle
East, among others. Only one of these events
derailed global financial markets: the 1973
war in the Middle East that resulted in an
oil embargo, caused oil prices to quadruple
and put much of the world into recession.
We stress test frequently virtually every
country and all credit, market and interest
rate exposures; and we analyze not only the
primary effects but the secondary and tertiary
consequences. And we stress test for extreme
moves like the one you recently saw around
oil prices. Rest assured, we extensively
manage our risks.
The Federal Reserves Comprehensive Capital
Analysis and Review (CCAR) stress test is another
tough measure of our survival capability. The

stress test is good for our industry in that it

clearly demonstrates the ability of each and
every bank to be properly capitalized, even
after an extremely difficult environment.
Specifically, the test is a nine-quarter scenario
where unemployment suddenly goes to
10.1%, home prices drop 25%, equities
plummet approximately 60%, credit losses
skyrocket and market-making loses a lot of
money (like in the Lehman Brothers crisis).

II. BUILT FOR THE LONG TERM

To make sure the test is severe enough, the

Fed essentially built into every banks results
some of the insufficient and poor decisions
that some banks made during the crisis.
While I dont explicitly know, I believe that
the Fed makes the following assumptions:

We would quickly cut our dividend and

stock buyback programs to conserve
capital. In fact, we reduced our dividend
dramatically in the first quarter of 2009
and stopped all stock buybacks in the first
quarter of 2008.

The stress test essentially assumes that

certain models dont work properly, particularly in credit (this clearly happened with
mortgages in 2009).

We would not let our balance sheet grow

quickly. And if we made an acquisition,
we would make sure we were properly
capitalized for it. When we bought Washington Mutual (WaMu) in September of
2008, we immediately raised $11.5 billion
in common equity to protect our capital
position. There is no way we would make
an acquisition that would leave us in a
precarious capital position.

The stress test assumes all of the negatives

of market moves but none of the positives.
The stress test assumes that all banks riskweighted assets would grow fairly significantly. (The Fed wants to make sure that
a bank can continue to lend into a crisis
and still pass the test.) This could clearly
happen to any one bank though it couldnt
happen to all banks at the same time.
The stress test does not allow a reduction
for stock buybacks and dividends. Again,
many banks did not do this until late in
the last crisis.
I believe the Fed is appropriately conservatively measuring the above-mentioned aspects
and wants to make sure that each and every
bank has adequate capital in a crisis without
having to rely on good management decisions,
perfect models and rapid responses.
We believe that we would perform far better
under the Feds stress scenario than the Feds
stress test implies. Let me be perfectly clear

I support the Feds stress test, and we at

JPMorgan Chase think that it is important
that the Fed stress test each bank the way it
does. But it also is important for our shareholders to understand the difference between
the Feds stress test and what we think actually would happen. Here are a few examples
of where we are fairly sure we would do
better than the stress test would imply:
We would be far more aggressive on
cutting expenses, particularly compensation, than the stress test allows.

And last, our trading losses would unlikely

be $20 billion as the stress test shows. The
stress test assumes that dramatic market
moves all take place on one day and that
there is very little recovery of values. In
the real world, prices drop over time,
and the volatility of prices causes bid/ask
spreads to widen which helps marketmakers. In a real-world example, in the six
months after the Lehman Brothers crisis,
J.P. Morgans actual trading results were
$4 billion of losses a significant portion
of which related to the Bear Stearns acquisition which would not be repeated. We
also believe that our trading exposures are
much more conservative today than they
were during the crisis.
Finally, and this should give our shareholders
a strong measure of comfort: During the
actual financial crisis of 2008 and 2009, we
never lost money in any quarter.
We hope that, over time, capital planning
becomes more predictable. We do not believe

that banks are trying to game the system.

What we are trying to do is understand the
regulatory goals and objectives so we can
properly embed them in our decision-making
process. It is critical for the banking system
that the treatment of capital is coherent and
17

II. BUILT FO R T H E LO N G T ER M

Therefore, we take a long-term perspective

on investing. How we currently view low net
interest margins is a good example of making
decisions for the long run

consistent over time and is not in any way

capricious. Capital is precious, and it needs to
be deployed intelligently in the business or
properly returned to shareholders. If shareholders do not have a clear understanding of
capital management and have unreasonable
expectations, then that capital will be devalued.
This is a bad outcome for all involved.

To capture our share of the growth in our

underlying businesses, we need to continually invest in bankers, branches and capabilities (research, products and technology) to
drive down our costs and better serve our
clients. It is a lot of hard work that needs to
be supported by all of our critical functions,
from finance and human resources to operations and controls. This kind of investing
should not be done in a stop-start way to
manage short-term profitability.

While there always will be cycles, we need to

keep our eye on the important things, too
the outlook for long-term growth is excellent
The needs of countries, companies, investor
clients and individuals will continue to grow
over time. The chart below shows some of
the long-term growth that is expected in
some critical areas, including the underlying
growth of gross domestic product and trade,
investable/financial assets, infrastructure and
capital markets activities. This is the fuel that
will drive our business in the future.

Quarterly earnings even annual earnings

frequently are the result of actions taken
over the past five or 10 years. Our company
continued to invest through the crisis often
when others could not in order to capture
future growth.

Global Macro Themes

2014

World gross
domestic product

2024

Growth

$ 78

$ 133

5.5% CAGR

$ 22

$ 38

1.7x

$ 263

$ 481

6% CAGR
12% emerging
4% developed

$36 over last 18 years

$57 over next 18 years

1.6x
2.6x emerging
1.1x developed

8,000

15,0001

1.9x
3.8x emerging
1.2x developed

($ in trillions)

World exports
($ in trillions)

Investable assets
($ in trillions)

Infrastructure
spend
($ in trillions)

Number of
companies with
$1+ billion revenue

Source: International Monetary Fund, World Bank, McKinsey, JPMorgan Chase analysis
1

2025 estimate

18

II. BUILT FOR THE LONG TERM

A very good current example of how we

view investing and long-term decision
making is how we are dealing with the
squeeze on our net interest margins (NIM)
due to extremely low interest rates. The best
example of this is in our consumer business,
where NIM has gone from 2.95% to 2.20%
(from 2009 to 2014). This spread reduction
has reduced our net interest income by $2.5
billion, from $10 billion to $7.5 billion or
if you look at it per account, from $240 to
$180. Since we strongly believe this is a
temporary phenomenon and we did not
want to take more risk to increase our NIM
(which we easily could have done), we
continued to open new accounts. Over those
years, we added 4.5 million accounts and,
in fact, very good sizable accounts. This has
reduced our operating margins from 36%
to 32%, but we dont care. When normal
interest rates return, we believe this will add
$3 billion to revenue and improve our operating margin to more than 40%.
Our long-term view means that we do not
manage to temporary P/E ratios the tail
should not wag the dog
Price/earnings (P/E) ratios, like stock prices,
are temporary and volatile and should not
be used to run and build a business. We
have built one great franchise, our way,
which has been quite successful for some
time. As long as the business being built is a
real franchise and can stand the test of time,
one should not overreact to Mr. Market.
This does not mean we should not listen to
what investors are saying it just means
we should not overreact to their comments
particularly if their views reflect temporary factors. While the stock market over a
long period of time is the ultimate judge of
performance, it is not a particularly good
judge over a short period of time. A more
consistent measure of value is our tangible
book value, which has had healthy growth
over time. Because of our conservative
accounting, tangible book value is a very
good measure of the growth of the value
of our company. In fact, when Mr. Market
gets very moody and depressed, we think it
might be a good time to buy back stock.

I often have received bad advice about what

we should do to earn a higher P/E ratio.
Before the crisis, I was told that we were
too conservatively financed and that more
leverage would help our earnings. Outsiders
said that one of our weaknesses in fixed
income trading was that we didnt do enough
collateralized debt obligations and structured
investment vehicles. And others said that we
couldnt afford to invest in initiatives like our
own branded credit cards and the buildout
of our Chase Private Client franchise during
the crisis. Examples like these are exactly the
reasons why one should not follow the herd.
While we acknowledge that our P/E ratio is
lower than many of our competitors ratio,
one must ask why. I believe our stock price
has been hurt by higher legal and regulatory
costs and continues to be depressed due to
future uncertainty regarding both.
We still face legal uncertainty though we are
determined to reduce it over time. Though

we still face legal uncertainty (particularly

around foreign exchange trading), we are
determined to reduce it and believe it will
diminish over time. I should point out that
while we certainly have made our share of
costly mistakes, a large portion of our legal
expense over the last few years has come
from issues that we acquired with Bear
Stearns and WaMu. These problems were far
in excess of our expectations. Virtually 70%
of all our mortgage legal costs, which have
been extraordinary (they now total close to
$19 billion), resulted from those two acquisitions. In the Bear Stearns case, we did not
anticipate that we would have to pay the
penalties we ultimately were required to pay.
And in the WaMu case, we thought we had
robust indemnities from the Federal Deposit
Insurance Corporation and the WaMu receivership, but as part of our negotiations with
the Department of Justice that led to our big
mortgage settlement, we had to give those
up. In case you were wondering: No, we
would not do something like Bear Stearns

19

II. BUILT FO R T H E LO N G T ER M

again in fact, I dont think our Board would

let me take the call. The WaMu deal might
still make sense but at a much lower price to
make up for the ongoing legal uncertainty
(including the governments ability to take
away our bargained-for indemnities). I did
not, and perhaps could not, have anticipated
such a turn of events. These are expensive
lessons that I will not forget.
Part of the issue around legal costs is that
banks are now frequently paying penalties to
five or six different regulators (both domestic
and international) on exactly the same issue.
This is an unprecedented approach that
probably warrants a serious policy discussion
especially if those regulators (as at least
some of them have acknowledged) dont take
into account what is being paid to the others.
For now, its simply a reality for big banks,
and certainly for us, that when one or more
employees do something wrong, well hear
from multiple regulators on the subject.
The good news is that our legal costs are
coming down and, we hope, will normalize
by 2016.
Uncertainty remains around regulatory requirements, though we believe this will diminish over
time, too. That uncertainty is particularly

acute around the extra capital that JPMorgan

Chase will have to hold because of the new
Global Systemically Important Bank (G-SIB)
rules, the ultimate impact of the Volcker
Rule, total loss-absorbing capacity, CCAR
and Recovery & Resolution. And its because
of that uncertainty that a majority of the
time I spend with analysts and investors
these days is devoted to regulation. Very
little time is spent talking about the actual

20

business, like client transactions, market

share gains or other business drivers. Many
questions still remain, and they are hard to
explain or are difficult to answer, including:
Why did American regulators simply double
the G-SIB capital requirements for American
banks versus all other global banks? Will
higher capital requirements be added later?
Given that much uncertainty, which is
greater for JPMorgan Chase than for most
other banks, it is understandable that people
would pay less for our earnings than they
otherwise might pay.
Having said all this, the contours of all of
the new regulations have emerged, and
we believe that regulatory uncertainty will
diminish over time. And, we hope, so will
the drag on our P/E ratio.
Think like a long-term investor, manage like
an operator
So our ultimate goal is to think like a longterm investor build great franchises,
strengthen moats and have good throughthe-cycle financial results. Achieve the
benefits of scale and eliminate the negatives.
Develop great long-term achievable strategies. And manage the business relentlessly,
like a great operator. Finally, continue to
develop excellent management that keeps
it all going. As Thomas Edison said, Vision
without execution is hallucination.

III. W E W I L L S U CC E SS F ULLY N AV I G ATE THE N E W G LOBAL

F I N A N C I A L A R C HI T EC TUR E (A N D WE A R E WE LL ON
O UR WAY TO HAV I N G FORTR E SS CON TR OLS )

We have meaningfully simplified the company

While I have said that it is good housekeeping
to keep our company as simple as possible,
we have done an extraordinary amount of
cleaning out this past year. More important,
last year, we said that we would do it, and
this year we actually did it. The chart below
shows that we did it by shedding businesses,
reducing products and materially de-risking
by reducing certain types of clients that
simply create too much risk in the new world.
In total, we have reduced approximately $25
billion in assets through this effort. All of
this makes the work of our compliance and
control executives that much easier, as they
can focus more on whats important.

We are well on our way to having fortress

controls
The intense effort over the last few years
now is yielding real results and will go a long
way in protecting the company in the future.
When we are done, we hope not just to have
met the heightened expectations of our regulators but to have exceeded them. In addition
to successfully completing CCAR (which we
will strive to do every year), there are other
examples of tangible progress. Following are
some of our accomplishments:
Strengthened compliance. We have added
approximately 8,000 people across the
firm with a mission to strengthen our
compliance capabilities. We have further
aligned global leadership to drive focus
and consistency across key risk areas such
as AML/BSA (Anti-Money Laundering/

Executed Significant Business Simplification Agenda

Operating with fortress principles
Simplifying our business


Completed the spin-out of One Equity

Partners and closed on the sale of a

portion of our Private Equity portfolio
Exited physical commodities business

Sold Global Special Opportunities


Group portfolio
Exit in process of majority of Broker


Dealer Services business
Terminated transaction services for ~500


Foreign Correspondent Banking clients
Ceased originating student loans

Other meaningful business actions

A
nnounced exit of Sears Canada and



several smaller non-core card partnerships

A
nnounced exit of International


Commercial Card
S
old interest in Carlson Wagonlit

Travel agency
Sold Retirement Plan Services unit

E
xited prepaid card and Order to Pay

businesses
Sold health savings account business

Incremental financial impact1

1
2

($ in billions)

2015

Revenue

$1.6

$0.7

Expense

$1.6

$0.6

S
implified Mortgage Banking products


from 37 to 18 products as of 2014,

with a target of further reducing to 15
R
ationalized Global Investment



Management products: reduced U.S.
funds # by net 6%, Asia funds net 4%
and Europe funds net 2% in 2014
D
e-risking through client selection



discontinuing certain businesses with
select clients:
Exited ~8,000 clients in Business


Banking and Commercial Banking
Exited ~5,500 foreign Politically


Exposed Person relationships
S
old significant portion of CIBs trade


finance EXIM/ECA2 portfolio

2016 and beyond

Does not include impact of the One Equity Partners and Private Equity portfolio sale
EXIM = ExportImport Bank; ECA = Export Credit Agency

21

III. A N E W GLO BA L F I N A N C I A L A R C H I T EC T U R E

Bank Secrecy Act), fiduciary risk, market

conduct risk, employee compliance and
privacy. We have enhanced our policies
and implemented new procedures and
technology support.
New anti-money laundering systems deployed.
We have implemented Mantas, an
industry-leading transaction monitoring
platform, for all U.S. dollar payment
transactions. This provides a significant improvement in our transaction
monitoring capabilities and allows us
to decommission multiple less effective
legacy systems. We also have upgraded
our processes and technology support in
AML investigations and sanctions. We
have more to do, but a strong foundation
is in place.
Foreign correspondent banking review. Given
the regulatory scrutiny around these
activities, we have exited many relationships with foreign correspondent banks
where we have risk-related concerns or
where we needed to simplify our business. In addition to the relationship
exits, we have improved our controls for
foreign correspondent banking activities,
including enhancing our technology to
better monitor U.S. dollar correspondent
bank transactions which allowed us to
implement 10 new transaction monitoring
scenarios to better track millions of transactions each day.
Enhanced controls in connection with payday
lender practices. We reviewed our policies, systems and processes to decrease
financial burdens on our customers and
hinder payday lenders ability to engage in
predatory collection practices. And then
we did the following: eliminated multiple
return item fees, enhanced our policy and
systems for stop payment requests, and
allowed account closure with a pending
transaction and/or a negative balance.
(NACHA rules originally did not allow a
bank to close an account with a pending
transaction. Consumers wanted to close

22

the account to stop payday lenders from

trying to take money from the account on
a daily basis.) In addition, we are working
with NACHA to develop new standards
for the entire industry.
Mortgage servicing improvements. As one
of the United States largest mortgage
lenders, some of our practices were not
designed to handle the unprecedented
increase in volume that occurred as a
result of the financial crisis. Therefore, we
reviewed the areas that needed enhancement and took the appropriate actions.
We focused on improving our operating
model, we dedicated more than 10,000
employees to assist customers that were
having difficulty making payments, and
we improved our communications with
customers to provide better counseling
and more clarity about the options available. We also invested more than 280,000
hours of our technology employees
time to improve our Mortgage Servicing
business, including enhancing the loan
modification application to improve the
systems that track and manage customer
complaints and responses.
Model review. More than 300 employees
are working in Model Risk and Development. In 2014, this highly specialized team completed over 500 model
reviews, implemented a system to assess
the ongoing performance of the 1,000+
most complex models in the firm, and
continued to enhance capital and loss
models for our company.
Fortunately, most of our strategies stay
essentially the same
Many banks will have to make some fairly
drastic changes to their strategies, and
because various banks are facing different
overarching constraints, those strategies may
be dramatically dissimilar. We are fortunate
that our strategies will remain essentially the
same, which allows us to avoid the upheaval,
both internally and externally with clients,
that often comes when strategies need to be
changed dramatically.

III. A NEW G LOBAL F INANCIAL ARCHITEC TU RE

However, a small percentage of our products

and services will require some surgery (more
on that later). In addition, because some
companies are making large strategic moves,
we would expect to see an ongoing shift in
market shares and pricing. It is possible that
we will benefit from both of these trends.

While uncertainty remains, the contours to

the new rules are largely known, and we have
made enormous progress adapting to them
The chart below describes the new rules and
regulations with which we need to comply.
And remember, these new rules affect each
product, business, legal entity and client.
Every requirement has a few hundred

2015 Financial Architecture

Description

Capital

Liquidity

Recovery & Resolution

Mortgages

Data reporting
and management

Derivatives

Volcker

Selected requirements

Selected JPMorgan Chase actions

Improving the banking sectors

ability to absorb losses arising from
financial and economic stress

750+ requirements with 21

regulators involved
~27 different capital ratio
requirements

9
 50+ people
20,000+ pages of supporting
documentation
225+ new models

Ensuring banks hold sufficient

liquid assets to survive acute
liquidity stress
Prevent overreliance on
short-term wholesale funding

500+ requirements
15+ jurisdictional variations
expected

400+ people
P
 rocess and store 1+ billion records
per day from 200+ feeds

Ensuring the resiliency of firms

to prevent failure
Preparing living wills

Annual global recovery plan

A
 nnual resolution plans for 34
entities, with plans by business
and critical operations
1
 0+ jurisdictions issued or
proposed Recovery & Resolution
regulation, with more expected

1,000+ people
1+ million work hours devoted
annually

Reforming the nations housing

finance system
Expanding origination, servicing
and securitization regulation

90+ new, proposed or amended

rules, notices and regulations
contained within ~13,000 pages
of regulatory text
~2,000 pages of systemic reform
legislation introduced

~800,000 compliance training

hours
~1.4 million work hours
dedicated to systems and process
implementation

E nhancing data-related capabilities

by increasing accountability
and transparency for data quality
I mproving the firms ability to
collect, manage and report on data
in order to facilitate greater market
and product transparency

1
 1 principles with 1,000+
requirements
3
 ,300+ pages of requirements,
principles and guidance

1,000+ people working across

43 business groups
120+ distinct programs with
1,400+ milestones

Enhancing pre- and post-trade

transparency
Promoting use of electronic trading
venues and central clearing
Bolstering capital and margin
requirements

99 proposed or finalized

regulations (U.S.) and 237 final
articles (European Union)
3
 ,150+ pages of requirements and
guidance

700+ people
60 workstreams

Restricting banks from undertaking

certain types of market activities
Controlling risks associated with
certain trading and funds-related
activity

1,000+ pages covering 36

requirements, with 5 regulators
involved

300+ people
7 trading metrics reported
monthly across 15 business
areas

Note: This list of regulations is not comprehensive; estimates of resources are approximate

23

III. A N E W GLO BA L F I N A N C I A L A R C H I T EC T U R E

detailed rules around it to which we need to

adapt. While it is a lot of work, we believe we
will be able to successfully accomplish all of
it. We have spoken about many of these rules
and requirements in the past so we wont
go into greater detail here, other than on the
new G-SIB capital rules, which will have some
material effects on some of our businesses.
Intense effort is going into understanding
and adapting to the new G-SIB capital rules.

Last year, we described how we had to

manage the company to satisfy several new
constraints (all of the liquidity, leverage,
capital and CCAR requirements). To do
this, we were pushing these new rules
and requirements all the way down to the
product and client levels. The G-SIB capital
rules are a new constraint that we also need
to manage to, and for JPMorgan Chase, they
possibly are the most important constraint,
though this may change over time. Therefore, we also need to push the new G-SIB
rules to the product and client levels.
Unlike RWA, which lets one measure the
risk embedded in each asset and, thus, the
capital needed to hold against it, G-SIB is
multivariate. G-SIB is not a simple calculation. It requires thousands of calculations,
and it does not look at just assets it looks
at products, services, assets, type of client
(i.e., international and financial or corporate)
and collateral type, among others in order to
determine capital levels.
G-SIB will have its highest impact on nonoperating deposits, gross derivatives, the
clearing business in general and certain
clients, particularly financial institutions,
including central banks. At the end of the
day, we believe that we can manage through
this process and reduce our capital requirements while maintaining our core franchises. To the extent that these changes
materially impact clients, we will do it
thoughtfully and carefully and help them
find appropriate alternatives.

24

G-SIB is not a direct measure of risk. The G-SIB

calculations show that JPMorgan Chase is the

most Global Systemically Important Bank,
and, therefore, we have to hold more capital
than any other bank in the world. Some of
our shareholders believe that this designation
implies that before the additional capital is
held, we may be the riskiest institution, too.
But G-SIB is not a true measure of risk, like
RWA or CCAR. (And as shareholders have
mentioned to me, many of these measures do
not indicate how they would look at risk; i.e.,
margins, earnings diversification and actual
performance in tough times, in addition to
criteria such as capital and liquidity.)
In fact, parts of G-SIB are very risk insensitive for example, it does not measure our
actual and largest risks in credit markets
(still our largest exposures) and it adds a
lot of capital for some activities that have
absolutely no risk involved. One example
will suffice: We take non-operating deposits
(deposits that are very short term in nature
from investors so they can manage their
short-term cash needs) from central banks
and large financial institutions. We have
approximately $350 billion of non-operating
deposits, a large portion from financial
institutions, which we immediately turn
around and deposit at the Federal Reserve,
and this is risk-free to us. We mostly do this
as an accommodation to large institutions
that need to move extensive sums of money
around and we generate minimal earnings
from this activity. We recently announced
that we are going to reduce these deposits
by $100 billion, which in the context of
the firms broader actions will reduce our
common equity requirements by approximately $3.5 billion. (Since these changes
involve some of the largest financial institutions in the world, we are doing this very
carefully and are trying to make sure that
clients have access to alternatives such as
access to money market funds and direct
access to Federal Reserve facilities.)

III. A NEW G LOBAL F INANCIAL ARCHITEC TU RE

We hope to learn a lot more about the G-SIB

calculations. Many questions remain, which
we hope will be answered over time such as:

We must and will meet the regulators

demands on Recovery & Resolution
whatever it takes

It is unclear (it has not been made transparent to us) how and why these calculations are supposed to reflect systemic risk.
In addition, they are relative calculations,
which means that even if we and everybody else all reduced these exposures,
our surcharge would not change, while
presumably systemic risk would drop.

A critical part of eliminating Too Big to

Fail is meeting the regulators demands on
Recovery & Resolution. The Recovery Plan
is the first line of defense in a crisis situation and serves as the road map for how
to prevent the firm from actually failing. It
gives the regulators the comfort that the firm
has done sufficient upfront planning and
analysis and has an outline for how the firm
could recover if confronted with a severe
financial crisis. The plan essentially helps the
regulators understand the comprehensive
set of alternatives and actions available to
enable the firm to fully recover and prevent a
failure. Resolution Plans, on the other hand,
are the playbooks for how the company can
be restructured or unwound in an orderly
way in the event of a failure so that other
banks and the general economy would not
suffer. The plans outline for the regulators a
set of strategies, necessary information and
detailed plans by legal entity. For instance,
JPMorgan Chase has reported that it has 34
legal entities and branches housing the vast
majority of the firms essential operations
and businesses. Each legal entity has to be
understood by the regulators and must have
distinct intercompany agreements and a
comprehensive plan in place to manage the
legal entity in the event that it needs to be
resolved. We have taken these requirements
very seriously as evidenced by the more than
1,000 people working diligently on the extensive Recovery & Resolution requirements.
In addition, we are working to reduce the
number of entities we have and to simplify
our structure and inter-entity arrangements.
We need to satisfy all of our regulators on
these plans, and we will do whatever it takes
to meet their expectations.

It is unclear how these calculations take

into consideration the extensive number
of new rules and regulations that are
supposed to reduce systemic risk (i.e., total
loss-absorbing capacity, net stable funding
ratio, liquidity coverage ratio, supplementary leverage ratio and the new Recovery
& Resolution rules).
It is unclear why the U.S. regulators
doubled the calculations versus everyone
else in the world, particularly since the
U.S. banking system, as a percentage of
the U.S. economy, is smaller than in most
other countries.
G-SIB is important, and we take it seriously. The

G-SIB capital surcharge, however calculated,

is an important part of our capital needs.
And since we are outsized, relative to our
competitors (our capital surcharge currently
is estimated as 4.5% of risk-weighted assets,
yet many of our competitors are between
2%-4% of risk-weighted assets), we will be
more comfortable when the surcharge is
reduced. We already have begun to lower the
surcharge by 0.5%, and, over time, expect
to do more than that. Marianne Lake and
Daniel Pinto gave details on this topic in
their Investor Day presentations. The regulators have made it clear that these are important measures of global systemic risk, and
they have given us a clear road map to how
we can reduce these exposures and we are
going to take that road.

There have been two critical developments

toward giving governments and regulators comfort on Recovery & Resolution,
which, according to some key regulators,
will effectively end Too Big to Fail and will

25

III. A N E W GLO BA L F I N A N C I A L A R C H I T EC T U R E

be completed in 2015. First, the regulators

have almost finished plans around total lossabsorbing capacity, which will require large
banks to hold a lot of additional long-term
debt, which, could be converted to equity in
the event of a failure and thereby enable the
firm to remain open to serve customers and
markets. Second, the industry agreed to put
in place specific rules and guidelines on how
to deal globally with derivatives contracts of
a failed institution. This gives regulators and
governments the knowledge that, in a failure,
derivatives contracts can be properly managed
and will not make the situation worse.

26

The industry will be stronger and safer

because of all of the new regulations, and the
future is bright for well-run banks
There is no question that, today, the global
banking system is safer and stronger
possibly more so than it has ever been.
That is not to say that the changes do
not create a whole range of challenges,
complexities and new risks (which we will
talk about in the next section). But at the
end of the day, the system will be safer and
more stable than ever. I may sound a little
like Voltaires optimistic character
Dr. Pangloss for saying this, but I am
hopeful that in the next five to 10 years, highquality banks will be thriving in their work
to support economies and help society.

IV. W E H AV E A S OLI D STR ATEGY A N D BE LI EV E OUR

F UT UR E OUTLOOK I S V E RY G OOD BUT, A S US UAL ,
T H E R E ST I L L A R E A LOT OF T HI N G S TO THI N K A N D
WOR RY A B OUT

We already have spoken about the fact that

most of our strategy will stay essentially the
same and that while some areas may require
a little surgery, we strongly believe we will be
able to successfully navigate the new world.
Some of that surgery will slow down our
growth a little bit in certain areas, but we are
quite optimistic that we can grow in others.
Most of our growth will be organic we have
been doing this successfully for a decade
and opportunities abound
We are optimistic that all of our businesses
can grow, and, below, I describe some initiatives that are particularly exciting.
Chase Private Client started as a gleam in our eye
back in 2010. Chase Private Client branches

are dedicated to serving our affluent clients

investment needs. From one test branch
(which didnt go very well, but, fortunately,
we kept on trying), we now have more than
2,500 Chase Private Client offices. They now
manage investments and deposits of $190
billion. While the branch buildout is essentially complete, we think the potential for
growth remains large.
Small business. We are making our premier

Excludes legal expense

products and services work better together

for a more holistic experience for our small
business customers, whose time and attention
should be spent on running their business,
not going to the bank. We see a huge opportunity in this fragmented market there is
no dominant bank for the 28 million small
businesses in the United States. At JPMorgan
Chase, we serve 3.9 million American small
businesses across Business Banking, Card
Services and Chase Commerce Solutions, and
we have successfully grown all of these businesses. We want to become the easiest bank
to do business with, and we are working hard
to speed applications, simplify forms and add
digital conveniences. For example, we want a
small business to fill out an application that
can qualify it for Ink (our small business

credit card), Paymentech, deposits and loans

all at once. We believe that if we bundle the
services that small businesses really want
and also provide meaningful advice, we can
dramatically grow this business. Looking
ahead, we know small businesses become
large companies at a much more rapid pace
than in years past. Serving these companies well now can solidify long-term client
relationships that could span several lines of
business in the future.
Excellent prospects for our Corporate &
Investment Bank. Our Corporate & Investment

Bank is an example of a business that has

had exceptional relative multi-year performance. And even recently when it has been
under a lot of regulatory pressure due to
higher capital constraints and other regulatory demands, the business has been able
to earn a 13% return on equity1. It is an
endgame winner, and it benefits substantially from the rest of the company, which
helps drive its best-in-class results.
However, in our current environment, we
dont expect a lot of growth or robust returns
as we adjust to the new world. But we
continue to believe that the long run is quite
attractive. At Investor Day, we showed that
the Corporate & Investment Bank in 2006
was #1, #2 or #3 in eight of the 16 product
categories that we are in. Now we are #1, #2
or #3 in 15 of the 16 product categories that
we are in. But the exciting part is a program
that Daniel Pinto calls Path to #1, which
shows when you divide those 16 businesses
into sub-businesses and geographies, there
are lots of areas where we are not close to #1,
#2 or #3, and, in most of those places, we
should be able to improve. So as the business goes through an inordinate amount of
change, the underlying needs of our clients
continue to grow, and we will grow with
them and believe we can gain share, too.

27

IV. SO LI D ST R AT EGY A N D FU T U R E O U T LO O K

We are going to do a better job covering family

and private offices in both the Private Bank
and the Investment Bank. Family offices have

Retail banking presence still has room to grow.

While we cannot acquire a retail bank in the

United States, we can and intend to enter
cities where we have never been. We will
keep those cities we might choose to enter a
surprise but we hope to begin doing this
in 2016. And remember, when we enter a
city, we can bring the full force of JPMorgan
Chase to bear, from retail, small business and
private banking to middle market and local
coverage of large corporations.

become larger, more sophisticated and

more global, and they actively buy minority
or whole stakes in businesses. More than
2,300 families across the globe had assets
of $1 billion or more in 2014. Together, they
control over $7 trillion in assets, a number
that has grown in excess of 10% since 2011.
While J.P. Morgan already works with many
of these families as clients, we believe we do
a far better job providing the full range of
products and services offered by our Private
Bank and Investment Bank.

We particularly are excited about our payments

business in total. The combination of Chase

Private banking will grow for years. In Mary

Erdoes Investor Day presentation, she

showed that while we have the best private
bank in the United States, our business still
is rather small, and there is plenty of room
to grow. This is even truer in Asia Pacific
and Latin America. The chart below shows
how strong our business is and illustrates
that there is plenty of room to grow our
market share internationally.

Paymentech, our merchant acquirer,

ChaseNet, our proprietary Visa-supported
network, and ChasePay, our proprietary
wallet, allows us to offer merchants
large and small better deals in terms of
economics, simpler contracts, better data
and more effective marketing to their clients.
It also allows us to better serve consumer
clients with a wide variety of offers and ease
of use. We are going to be very aggressive in
growing this business, and we will be disappointed if we dont announce some exciting
and potentially market-changing ventures.

Trusted Advisor
Advisor to
to the
the Worlds
Worlds Most
Most Sophisticated
Sophisticated Clients
Clients
Trusted
% client assets from clients with $10+ million (2013)
86%

2006-2013 client asset CAGR

U.S.
>50% of JPM PB client
assets from clients with
$100+ million

Industry

36%
26%

MS1

BAC1
(ML)

Europe/
Middle East/
Africa

Asia/
Pacific

4%
Industry

8%
Industry

JPM PB
market share

4%

JPM PB

6%
Industry

47%

UBS

9%

15%

Latin America/
Caribbean

JPM
PB1

4%

JPM PB
market share

1%

JPM PB

8%

JPM PB
market share

JPM PB

<1%

14%

JPM PB
market share

JPM PB

Every +10 basis points in market share internationally = $150+ million of revenue
1

PB = Private Bank; MS = Morgan Stanley; BAC = Bank of America (Merrill Lynch)

28

<1%

IV. S OLID STRATEGY AND F UTURE OUTLOOK

Big, fast data. We continue to leverage the

Silicon Valley is coming. There are hundreds

data generated across JPMorgan Chase, as

well as data that we purchase to create intelligent solutions that support our internal
activities and allow us to provide value and
insights to our clients. For example, we are
monitoring our credit card and treasury
services transactions to catch fraudulent
activities before they impact our clients, we
are helping our clients mitigate costs by optimizing the collateral they post in support of
derivatives contracts, and we are highlighting
insights to our merchant acquiring and
co-brand partners.

of startups with a lot of brains and money

working on various alternatives to traditional banking. The ones you read about
most are in the lending business, whereby
the firms can lend to individuals and small
businesses very quickly and these entities believe effectively by using Big Data
to enhance credit underwriting. They are
very good at reducing the pain points in
that they can make loans in minutes, which
might take banks weeks. We are going to
work hard to make our services as seamless and competitive as theirs. And we also
are completely comfortable with partnering
where it makes sense.

There always will be new emerging

competitors that we need to keep an eye on
New competitors always will be emerging
and that is even truer today because of new
technologies and large changes in regulations. The combination of these factors will
have a lot of people looking to compete
with banks because they have fewer capital
and regulatory constraints and fewer legacy
systems. We also have a healthy fear of the
potential effects of an uneven playing field,
which may be developing. Below are some
areas that we are keeping an eye on.
Large banks outside the United States are
coming. In terms of profitability, the top two

Chinese banks are almost twice our size.

Thirty years ago, Industrial and Commercial
Bank of China operated in only a handful
of countries, but it now has branches or
subsidiaries in more than 50 countries. It has
a huge home market and a strategic reason
to follow the large, rapidly growing global
Chinese multinationals overseas. It may take
10 years, but wed be foolish to discount their
ambition and resources. Were also seeing
world-class banks emerge and grow in places
like India and Brazil, and Japanese and Canadian banks are coming on strong, too. Many
of these banks are supported in their expansionary efforts by their government and will
not need to live by some of the same rules
that we in the United States must adhere to,
including capital requirements. We welcome
the competition, but we are worried that an
uneven playing field may hamper us many
years from now.

Competitors are coming in the payments area.

You all have read about Bitcoin, merchants

building their own networks, PayPal and
PayPal look-alikes. Payments are a critical
business for us and we are quite good at it.
But there is much for us to learn in terms of
real-time systems, better encryption techniques, and reduction of costs and pain
points for customers.
Some payments systems, particularly the
ACH system controlled by NACHA, cannot
function in real time and, worse, are continuously misused by free riders on the system.
There is a true cost to allowing people to
move money. For example, it costs retailers
50-70 basis points to use cash (due to
preventing fraud and providing security,
etc.). And retailers often will pay 1% to an
intermediary to guarantee that a check is
good. A guaranteed check essentially is the
same as a debit card transaction for which
they want to pay 0%. For some competitors, free riding is the only thing that makes
their competition possible. Having said that,
we need to acknowledge our own flaws. We
need to build a real-time system that properly charges participants for usage, allows for
good customer service, and minimizes fraud
and bad behavior.
Rest assured, we analyze all of our competitors in excruciating detail so we can learn
what they are doing and develop our own
strategies accordingly.
29

IV. SO LI D ST R AT EGY A N D FU T U R E O U T LO O K

Cybersecurity, fraud and privacy need

intensive investment on the part of your
entire company, and we must do it in
collaboration with the government and
regulators
Matt Zames describes on page 40 some of
the efforts we are making on cyber. What
I want to emphasize to our shareholders is
the absolute, critical and immediate need to
combat cybersecurity threats and the related
issues of fighting fraud and protecting
privacy. In these areas, we will do whatever it
takes to protect the company and its clients.
Regarding privacy, I do not believe that most
people fully understand what no longer is
private and how their information is being
bought, sold and used. As a bank, we are
appropriately restricted in how we can use
our data, but we have found many examples of our data being misused by a third
party. We are going to be very aggressive in
limiting and controlling how third parties
can use JPMorgan Chase data.
It is critical that government and business
and regulators collaborate effectively and
in real time. Cybersecurity is an area where
government and business have been working
well together, but there is much more to be
done. And if it is not done in a concerted
way, we all will pay a terrible price.
The banking system is far safer than it has
been in the past, but we need to be mindful
of the consequences of the myriad new
regulations and current monetary policy
on the money markets and liquidity in the
marketplace particularly if we enter a
highly stressed environment
There are many new rules, and, in conjunction with current monetary policy, they
already are having a large effect on money
markets and liquidity in the marketplace.
One famous scientist once said, A Rule of
Three (ART): A statistical specification with
more than three explanatory variables is
meaningless. Simply put, it is impossible to
figure out the cumulative effect of all these

30

changes even in a benign environment.

But what is far more important is what the
effect of these changes might be if we enter a
stressed environment. As a risk policy matter,
we need to make the assumption that there
will be unpredictable and unintended consequences sometimes these are to good effect,
but what we need to worry about are those
that have a potentially bad effect.
In the rest of this section, we will look at how
the table is set what is going on that is the
same or different than in the past. Later in
this section, we will speculate on what might
happen differently if we enter a new crisis.
Most important, we will enter the next crisis
with a banking system that is stronger than it
has ever been

Each individual bank is safer than before,

and the banking sector overall is stronger
and sounder because, among other things:
Capital levels are far higher today than
before the crisis and, by some measures,
higher than they have ever been. For
example, a very basic measure of capital,
going back around 100 years, was a simple
ratio of equity to assets. In the last six
years, its back to high numbers not seen
since the late 1930s.
Highly liquid assets held by banks probably are much higher than ever before.
Many exotic and complex products are
gone.
Many standardized derivatives are moving
to clearinghouses.
Both consumer and commercial loans are
underwritten to better standards than
before the crisis.
Transparency to investors is far higher.
Boards and regulators are far more
engaged.

IV. S OLID STRATEGY AND F UTURE OUTLOOK

But many things will be different for example,

there will be far more risk residing in the central
clearinghouses, and non-bank competitors will
have become bigger lenders in the marketplace

Clearinghouses will be the repository of far

more risk than they were in the last crisis
because more derivatives will be cleared
in central clearinghouses. It is important
to remember that clearinghouses consolidate but dont necessarily eliminate risk.
That risk, however, is mitigated by proper
margining and collateral. We have long maintained that it is important to stress test central
clearinghouses in a similar way that banks are
stress tested to make sure the central clearinghouses capital and resources are sufficient
for a highly stressed environment. Clearinghouses are a good thing but not if they are a
point of failure in the next crisis.
Non-bank competitors are increasingly
beginning to do basic lending in consumer,
small business and middle market. In middle
market syndicated lending, their share
recently has increased from 3% a few years
ago to 5% today, and many people estimate that it will continue to increase over
the years to come. There is nothing wrong
with having competitors, including nonbank competitors. However, they will act
differently from banks in the next stressed
environment. I will write about this later in
this section when we go through a thought
exercise of the next crisis.
There already is far less liquidity in the general
marketplace: why this is important to issuers and
investors

Liquidity in the marketplace is of value to

both issuers of securities and investors in
securities. For issuers, it reduces their cost of
issuance, and for investors, it reduces their
cost when they buy or sell. Liquidity can
be even more important in a stressed time
because investors need to sell quickly, and
without liquidity, prices can gap, fear can
grow and illiquidity can quickly spread
even in supposedly the most liquid markets.

Some investors take comfort in the fact that

spreads (i.e., the price between bid and ask)
have remained rather low and healthy. But
market depth is far lower than it was, and we
believe that is a precursor of liquidity. For
example, the market depth of 10-year Treasuries (defined as the average size of the best
three bids and offers) today is $125 million,
down from $500 million at its peak in 2007.
The likely explanation for the lower depth in
almost all bond markets is that inventories
of market-makers positions are dramatically lower than in the past. For instance, the
total inventory of Treasuries readily available to market-makers today is $1.7 trillion,
down from $2.7 trillion at its peak in 2007.
Meanwhile, the Treasury market is $12.5 trillion; it was $4.4 trillion in 2007. The trend
in dealer positions of corporate bonds is
similar. Dealer positions in corporate securities are down by about 75% from their 2007
peak, while the amount of corporate bonds
outstanding has grown by 50% since then.
Inventories are lower not because of one
new rule but because of the multiple new
rules that affect market-making, including far
higher capital and liquidity requirements and
the pending implementation of the Volcker
Rule. There are other potential rules, which
also may be adding to this phenomenon. For
example, post-trade transparency makes it
harder to do sizable trades since the whole
world will know ones position, in short order.
Recent activity in the Treasury markets and the
currency markets is a warning shot across the bow

Treasury markets were quite turbulent in

the spring and summer of 2013, when the
Fed hinted that it soon would slow its asset
purchases. Then on one day, October 15,
2014, Treasury securities moved 40 basis
points, statistically 7 to 8 standard deviations
an unprecedented move an event that
is supposed to happen only once in every 3
billion years or so (the Treasury market has
only been around for 200 years or so of
course, this should make you question statistics to begin with). Some currencies recently
have had similar large moves. Importantly,
Treasuries and major country currencies are
considered the most standardized and liquid
financial instruments in the world.
31

IV. SO LI D ST R AT EGY A N D FU T U R E O U T LO O K

The good news is that almost no one was

significantly hurt by this, which does show
good resilience in the system. But this
happened in what we still would consider
a fairly benign environment. If it were to
happen in a stressed environment, it could
have far worse consequences.
Some things never change there will be
another crisis, and its impact will be felt by
the financial markets
The trigger to the next crisis will not be
the same as the trigger to the last one but
there will be another crisis. Triggering events
could be geopolitical (the 1973 Middle East
crisis), a recession where the Fed rapidly
increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the
late 1980s), the commercial real estate crisis
(in the early 1990s), the Asian crisis (in 1997),
so-called bubbles (the 2000 Internet bubble
and the 2008 mortgage/housing bubble),
etc. While the past crises had different roots
(you could spend a lot of time arguing the
degree to which geopolitical, economic or
purely financial factors caused each crisis),
they generally had a strong effect across the
financial markets.
While crises look different, the anatomy
of how they play out does have common
threads. When a crisis starts, investors try to
protect themselves. First, they sell the assets
they believe are at the root of the problem.
Second, they generally look to put more of
their money in safe havens, commonly selling
riskier assets like credit and equities and
buying safer assets by putting deposits in
strong banks, buying Treasuries or purchasing
very safe money market funds. Often at
one point in a crisis, investors can sell only
less risky assets if they need to raise cash
because, virtually, there may be no market
for the riskier ones. These investors include
individuals, corporations, mutual funds,
pension plans, hedge funds pretty much
everyone each individually doing the right
thing for themselves but, collectively, creating
the market disruption that weve witnessed
before. This is the run-on-the-market
phenomenon that you saw in the last crisis.
32

And now, a thought exercise of what might be

different in the next crisis
It sometimes is productive to conduct a
thought exercise in effect trying to re-enact a
run on the market but, in this case, applying
the new rules to see what effect they might
have. Even though we must necessarily be
prepared for a crisis at all times, we hope a
real crisis is many years down the road. And
in the United States, we would be entering
the crisis with a banking system that is far
stronger than in the past, which, on its own,
could reduce the probability and severity of
the next crisis. We are not going to guess at
the potential cause of the crisis, but we will
assume that, as usual, we will have the normal
run-on-the-market type of behavior by investors. So lets now turn to look at how a crisis
might affect the markets in the new world.
The money markets (deposits, repos, short-term
Treasuries) will behave differently in the next crisis

Banks are required to hold liquid assets

against 100% of potential cash outflows
in a crisis. Liquid assets essentially are
cash held at central banks, Treasuries
and agency mortgage-backed securities.
Outflows are an estimate of how much
cash would leave the bank in the first
30 days of a crisis. This would include
things like deposit outflows, depending
on the type of deposit, and revolver takedowns, depending primarily on the type
of borrower. In my opinion, banks and
their board of directors will be very reluctant to allow a liquidity coverage ratio
below 100% even if the regulators say
it is okay. And, in particular, no bank will
want to be the first institution to report a
liquidity coverage ratio below 100% for
fear of looking weak.
In a crisis, weak banks lose deposits, while
strong banks usually gain them. In 2008,
JPMorgan Chases deposits went up more
than $100 billion. It is unlikely that we
would want to accept new deposits the
next time around because they would be
considered non-operating deposits (short
term in nature) and would require valuable capital under both the supplementary
leverage ratio and G-SIB.

IV. S OLID STRATEGY AND F UTURE OUTLOOK

In a crisis, everyone rushes into Treasuries to protect themselves. In the last

crisis, many investors sold risky assets
and added more than $2 trillion to their
ownership of Treasuries (by buying
Treasuries or government money market
funds). This will be even more true in the
next crisis. But it seems to us that there
is a greatly reduced supply of Treasuries
to go around in effect, there may be a
shortage of all forms of good collateral.
Currently, $13 trillion of Treasuries are
outstanding, but, according to our estimates, less than half of this amount is
effectively free to be sold. Approximately
$6 trillion is accounted for by foreign
exchange reserve holdings for foreign
countries that have a strong desire to
hold Treasuries in order to manage their
currencies. The Federal Reserve owns $2.5
trillion in Treasuries, which it has said it
will not sell for now; and banks hold $0.5
trillion, which, for the most part, they are
required to hold due to liquidity requirements. Many people point out that the
banks now hold $2.7 trillion in excess
reserves at the Federal Reserve (JPMorgan
Chase alone has more than $450 billion
at the Fed). But in the new world, these
reserves are not excess sources of
liquidity at all, as they are required to
maintain a banks liquidity coverage ratio.
In a crisis, if banks turn away deposits,
most investors will have other options,
which include:
1. Buying Treasuries directly.
2. Buying money market funds, which
own Treasuries.
3. Buying repos, which are collateralized
by Treasuries.
4. Investing directly at the Fed for a
limited set of investors (governmentsponsored enterprises, money funds).
5. Purchasing credit instruments like
commercial paper.

Buyers of credit (loans, secured loans,

underwriting and investments) will be more
reluctant to extend credit

In the crisis, many banks lent against

various forms of good collateral (but not
necessarily the highest quality collateral)
to help clients create liquidity and navigate through the crisis. The collateral often
came with significant haircuts and was of
the type that banks thought they easily
could risk-manage, and, for the most part,
they did. In the last crisis, JPMorgan Chase
did tens of billions of this type of lending.
In the next crisis, banks will have a hard
time increasing this type of credit because
it will require capital and more liquidity.
In a crisis, clients also draw down revolvers
(for JPMorgan Chase alone, this peaked
at approximately $20 billion at one point
in 2009) sometimes because they want
to be conservative and have cash on hand
and sometimes because they need the
money. As clients draw down revolvers,
risk-weighted assets go up, as will the
capital needed to support the revolver. In
addition, under the advanced Basel rules,
we calculate that capital requirements can
go up more than 15% because, in a crisis,
assets are calculated to be even riskier. This
certainly is very procyclical and would
force banks to hoard capital.
In addition, banks may have a decrease
in capital because new regulatory capital
rules require losses on investment securities to reduce regulatory capital. This
would be particularly true if interest rates
were rising in the next crisis, which cannot
be ruled out. (Typically, Treasury yields
drop dramatically in a crisis, and that
possibly could happen in this case, too,
especially as they would be in short supply.
But, again, one cannot rely on this.)
In the last crisis, some healthy banks used
their investment portfolios to buy and
hold securities or loans. In the next crisis,
banks will not be able to do that because
buying most types of securities or loans
would increase their RWA and reduce
their liquidity.
33

IV. SO LI D ST R AT EGY A N D FU T U R E O U T LO O K

In the last crisis, banks underwrote (for

other banks) $110 billion of stock issuance through rights offerings. Banks
might be reluctant to do this again
because it utilizes precious capital and
requires more liquidity.
It is my belief that in a crisis environment, non-bank lenders will not continue
rolling over loans or extending new
credit except at exorbitant prices that
take advantage of the crisis situation.
On the other hand, banks continued to
lend at fair prices in the last crisis because
of the long-term and total relationship
involved. Banks knew they had to lend
freely because effectively they are the
lender of last resort to their clients as the
Federal Reserve is to the banks. This is a
critical point: JPMorgan Chase and most
other banks understood their vital role in
actively lending to clients. In 2008 and
2009, JPMorgan Chase rolled over more
than $260 billion of loans and credit facilities to small businesses, middle market
companies and large companies, in addition
to $18 billion for states and municipalities,
hospitals and nonprofits. We rolled over
these capital and lending commitments to
support our clients and always maintained
fair (and not rapacious) pricing, reflecting
our long-term relationship with them.

The markets in general could be more volatile

this could lead to a more rapid reduction of
valuations

The items mentioned above (low inventory,

reluctance to extend credit, etc.) make it more
likely that a crisis will cause more volatile
market movements with a rapid decline
in valuations even in what are very liquid
markets. It will be harder for banks either as
lenders or market-makers to stand against
the tide.
But the American financial markets and, more
important, the American economy generally have
been extraordinarily resilient

Banks may be less able to act positively in

the next crisis, but they also are far stronger
and unlikely, in our opinion, to create the
next crisis. Many other actors in the financial
system, from hedge funds to long-term investors, including corporations and large money
managers, will, at some point, step in and buy
assets. The government, of course, always is
able to step in and play an important role.
In addition, regulators can improve the
liquidity rules to allow banks to provide
liquidity on a more graduated basis against
more types of assets and give more flexibility
on the margin than is required. That is, they
can give themselves both gas and brakes; i.e.,
change liquidity rules to fit the environment.
In addition, we should try to eliminate procyclical rules, which can exacerbate a crisis.
Fundamentally, as long as the economy is not
collapsing, financial markets generally recover.
Whatever the turn of events, JPMorgan Chase
will have the capability to play its role in
supporting clients and communities in the
countries in which we operate.

34

V. WE HAVE A FULLY ENGAGED BOARD, AN EXCEPTIONAL

M A N AG E M E NT T E A M A N D A ST R ON G COR POR AT E
C ULT UR E

We want to be a standard-bearer in the

industry when it comes to meeting the
heightened standards demanded by our regulators and not just because its required
but because we think its the right thing to
do for our shareholders, clients, employees
and communities. And we want to do this
across all measures from our controls
to board governance, the cultivating of a
strong culture and how we are fighting cyber
attacks to how we treat our clients. It starts
at the top with the Board of Directors.
Your Board is fully engaged in all critical
matters
The entire Board is fully engaged in the affairs of
the company. Board members are fully engaged

in the company, from setting the agenda of

the Board meetings to reviewing strategy and
demanding strong controls to determining
CEO compensation and succession planning.
Board members also are increasingly engaged
in regulatory and shareholder affairs. Several
of the Board members meet regularly with
our key regulators and major shareholders.
Management succession planning is a priority of
the Board. Regarding succession planning,

the Board always must be prepared for the

hit-by-the-bus scenario (which, of course,
is not my preference), but ongoing succession planning for the medium and long term
is the highest priority of the Board. Importantly, our Board members have complete
access to and relationships with the key
senior people and continually interact with
them, both formally and informally. Both the
Board members and I believe that, under all
scenarios, this company has several capable
potential successors.

have an open conversation about the CEO

and the company without feeling any pressure. The Board continues that practice
today. New rules mandate that directors meet
at least once a year without the CEO yet
our Board does so at every Board meeting;
i.e., eight times a year. And usually at the
end of the session, the Lead Director comes
to see me to give feedback and guidance
about what the Board is thinking and what
it wants.
We have a strong corporate culture but we
must continuously strengthen it
JPMorgan Chase has served its shareholders,
customers and communities with distinction for more than 200 years. Since we were
founded, our company has been guided by a
simple principle that perhaps was best articulated by J.P. Morgan, Jr., in 1933, when he
said: I should state that at all times, the idea
of doing only first-class business, and that in
a first-class way, has been before our minds.
We continue to strive to meet that principle.
Acknowledging mistakes and learning from
them is part of the fabric of this company. We

also recognize that we have made a number

of mistakes some of them quite painful
and costly over the last several years. One
of the things we learned was that we needed
to redouble our efforts around culture not
reinvent our culture but recommit to it and
ensure that it is an enduring strength of this
institution. While we have done an extensive
amount of work over the past year and a half
to make sure we get this right, we know that
it cant be a one-time effort. Its like keeping
physically fit you cant get in shape and
expect to stay that way if you stop exercising.

The full Board meets without the CEO at every

Board meeting. Going way back to Bank Ones

Board more than a decade ago and before

it was mandated, the Board would meet
without the CEO (thats me) because we all
thought it was best for Board members to
35

V. A STR O N G CO R P O R ATE C U LT U R E

Our efforts around culture and conduct are

substantial and include the following:
We will continuously reinforce our business
principles. Back in July 2004 at the close of

the JPMorgan Chase and Bank One merger,

we sent a small blue book to all employees
outlining the capabilities of the combined
firm, as well as our mission and business
principles. While much has changed over
the past decade, our commitment to these
principles remains the same. In July 2014, we
marked the 10-year anniversary of JPMorgan
Chase and Bank One coming together to
form this exceptional company. It was fitting
that on this special occasion, we rededicated
ourselves to those same business principles
by distributing the rearticulated business
principles on How We Do Business to every
person in the company. These core principles (which are written in plain English and
include lots of specific examples) describe
how we want to conduct business, and they
will continue to guide us as we move forward.
What we are doing differently today is that
we are taking substantial actions to continuously inculcate our employees and our leadership on these principles:
We want to make the How We Do Business principles part of every major conversation at the company from the hiring,
onboarding and training of new recruits to
town halls and management meetings.
We conduct a substantial amount of
ongoing training and certification, from
the Code of Conduct for all employees
to the Code of Ethics for Finance Professionals that applies to the CEO, Chief
Financial Officer, Controller and all professionals of the firm worldwide serving in a
finance, accounting, corporate treasury, tax
or investor relations role.
We have enhanced our leadership
training. We have thousands of educational programs, and we have consistently
trained the top several hundred people on
leadership. But we did not train people
when they became first-time managers
or, importantly, managers of managers.
36

This will be another opportunity to drive

home our How We Do Business principles.
The heart of this training provides the
chance to teach our leadership how to do
the right thing not the easy thing and
to continually reinforce the principle of
treating others in the way you would like
to be treated.
We also developed a pilot program within
our Corporate & Investment Bank in
Europe, the Middle East and Africa on
How We Do Business, which includes
focus groups and other efforts to analyze
cultural themes and address any concerns
around conduct and behavior. This year,
we have taken the learnings from that pilot
and will be rolling them out in a global,
firmwide Culture and Conduct Program.
These initiatives will make us a better
company. We hope they will reduce any bad
behavior. No human endeavor can ever be
perfect, but we are hopeful that as incidences
of bad behavior decline and as managements
responses to bad behavior are vigorous,
governments and regulators will appreciate
the intensity of our efforts.
Compensation has been consistent and
fair and is awarded with proper pay-forperformance
Our long-term success depends on the talents
of our employees. And our firms compensation system plays a significant role in our
ability to attract, retain and motivate the
highest quality workforce. We design our
compensation program to encompass best
practices, support our business objectives
and enhance shareholder value. For example:
We do not have change-of-control agreements, special executive retirement plans,
golden parachutes or things like special
severance packages for senior executives.
We do not pay bonuses for completing a
merger, which we regard as part of the job.
(When a merger has proved successful,
compensation might go up.)

V. A STRONG CORPORATE CULTURE

We virtually have no private deals or

multi-year contracts for senior management.
We always have looked at financial performance as a critical factor, but not the only
factor, in pay-for-performance. We have
formulas (which always have been properly charged for capital usage) for how we
accrue compensation, but we do not pay it
out in a formulaic way to anyone. Financial performance alone is not a comprehensive picture of performance. Broader
contributions are important, like qualitative skills such as leadership attributes,
character and integrity, and management
ability. This also includes recruiting,
coaching and training, building better
systems and fostering innovation, just to
name a few.
We also have invoked comprehensive
clawbacks of previously granted awards
and/or repayment of previously vested
awards when we thought it was appropriate. In 2014 alone, more than 200
employees had compensation reduced for
risk- and control-related events. Importantly, many more than that were terminated for poor performance or ethical
lapses during the course of the year.
Compensation alone is not enough, and one
should not confuse good compensation with good
morale. Getting compensation right is crit-

ical everyone wants to feel they are being

paid fairly, and most people have other
alternatives. But proper compensation alone
is not enough. I have seen many companies
try to make up for politics, bureaucracy and
low morale with high compensation it
does not work. When a company has been
doing poorly, or treats its customers badly,
the company should expect low morale.
What employees want to see is that the
company faces its issues, reduces politics
and bureaucracy, and improves customer
service and satisfaction. Maintaining a
corporate culture where the right people
are promoted and everyone is treated with
respect is as important as compensation.
Then morale will improve, and employees
will be proud of where they work every day.

We need to operate like a partnership. If, for

example, a companys largest, and perhaps

most important, business unit is under
enormous stress and strain, unlikely to earn
money regardless of who is in charge, a
manager might ask his or her best leader to
take on the job of running that business. This
may be the toughest job in the company,
one that will take years to work through
before the ship has been righted. When the
manager asks a leader to take on the responsibility, she quite appropriately will want to
know whether she will be supported in the
toughest of times: Will you make sure the
organization doesnt desert me? Will you
stop the politics of people using my units
poor performance against me? Will you
compensate me fairly? My answer to these
questions would be yes. And as long as I
thought she was doing the job well, I would
want to pay her like our best leaders, profits
aside. Conversely, we all know that a rising
tide lifts all boats. When thats the case,
paying that leader too much possibly is the
worst thing one can do because it teaches
people the wrong lesson.
We still believe deeply in share ownership. We

would like all our senior managers to have

a large portion of their net worth in the
company. We believe this fosters partnership. While some make the argument that it
causes excessive risk taking we disagree.
The first people to lose all of their money if
a company fails are the shareholders and the
management team. We want your management team to be good stewards of your
capital and to treat it as they would their
own. It is formulaic compensation plans,
where people are paid solely on financial
performance, that can cause undue risky and
bad behavior.
The entire Operating Committee gets involved
in compensation it is not done in a back room.

One way we make sure we are fair and

just with compensation is that the entire
Operating Committee spends a substantial
amount of time reviewing the compensation
of our top 500 people this way, we have

37

V. A STR O N G CO R P O R ATE C U LT U R E

internal justice, we can review someones

total performance across all measures,
and we can understand how a manager
manages up, down and across the organization not just up.
We want to have the best people, and competitive compensation is critical. We must

continue to pay our people properly,

competitively and well for doing a good job.
It is imperative at JPMorgan Chase that we
continue to attract and retain the best.
We treat all of our people fairly. While we

generally talk about compensation for the

most senior managers, the compensation
levels of our entire employee population
are fairly similar to that of the U.S. populations household income distribution. We
invest a significant amount of time and
money to ensure that all of our employees
are properly compensated. We still have
a defined benefit pension plan for most
of our employees that provides a fixed
income upon retirement to supplement
Social Security and any other savings they
have. We also provide a 401(k) plan with
matching dollars. In addition, we have excellent healthcare plans that incentivize people
to take care of themselves. For example,
premiums are lower if an employee gets
an annual physical examination or stops
smoking. We also subsidize these healthcare plans more for lower paid employees
(at 90%) versus our higher paid employees
(who are at 50%). And each year, we are
recognized as a great place to work by
various groups, including Working Mother
100 Best Companies, Top 100 Military
Friendly Employers by G.I. Jobs magazine
and Best Employers for Healthy Lifestyles
by the National Business Group on Health,
among many others.

As we centralize all risk functions, we also

must be certain that line of business CEOs
remain empowered to manage their business
end to end
We always have tried to be very thoughtful
about which functions are centralized or
decentralized at the company. We always
have centralized functions that can create
huge economies of scale like data centers or
utilities that are used by the entire company
(like general ledgers and payroll) or critical
control functions (like Corporate Legal,
firmwide accounting policies, etc.). We try
to decentralize where we can and when it
makes sense to do so. For example, while a
lot of finance functions reside at Corporate (like accounting policy), some finance
people are devoted to only one line of
business, so we keep them within that line
of business. We do this to provide direct
accountability, speed up decision making
and minimize bureaucracy.
In the new world, in order to improve the
consistency of controls, regulators have
demanded that most risk and control functions be centralized, including Risk, Compliance, Finance, Oversight & Control, Audit
and Legal. In doing this, we have given huge
amounts of additional authority to functions
at our corporate headquarters. Corporate
headquarters can sometimes forget that it
exists only because there is a banker in front
of a client somewhere. The Home Depot, one
of Americas great companies, does not call its
corporate headquarters the corporate headquarters its called Store Support Center to
remind employees every day why they are
there: to support the stores and the clients.
This still remains true at JPMorgan Chase
we at Corporate would not be here if we
didnt have our bankers in front of clients.
We need to work hard to get the best of both
centralization and decentralization. And we

need to manage Corporate so the line of business CEOs and management teams are fully
responsible and empowered to manage their
businesses. Centralization should not mean
demoralizing bureaucracy or slowing down
services as multiple committees and layers
38

V. A STRONG CORPORATE CULTURE

sign off on every decision and stifle innovation. We have been managing through this
process with our eyes wide open. The Operating Committee members of the company
spend a considerable amount of time to
make sure we get this right.
We need to develop the right culture and avoid
creating a culture of finger-pointing. We need

to analyze our mistakes because that is

the only way we can fix them and consistently improve. But we cannot allow this to
devolve into crippling bureaucratic activity
or create a culture of backstabbing and
blame. We need to develop a safe environment where people can raise issues and
admit and analyze mistakes without fear of
retribution. We must treat people properly
and respectfully even if we have to make
tough decisions.

I believe this company currently has the best

management team with whom I have ever
been associated and I mean their character,
culture and capabilities. I now ask questions
that I did not ask when I was a younger
manager: Would I want to work for these
managers? Would I want my children to
work for these managers? My answer would
not always have been yes, but now it is. These
leaders have navigated the last several years
with fortitude and a smile, driving results,
making tough decisions and treating each
other as complete partners. They are the
reason why both performance and morale
remain strong in this environment.

C LOS I N G COMME N TS

I feel enormously fortunate to be part of the remarkable 200-year

journey of this exceptional company.
I wish you all could see our employees and your management team at
work, particularly in these challenging times. If you did, I know that
you, like me, would be bursting with appreciation and pride and have
great comfort in knowing that our wonderful legacy will continue.

Jamie Dimon
Chairman and Chief Executive Officer
April 8, 2015

39