November 25, 2020

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JP Morgan Chase & Co. Variable Interest Entity (VIEs) Losses and Level 3 Assets

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 Introduction

JP Morgan Chase & Co. is currently committed to several off-balance sheet arrangements and contractual obligations that may need future cash payments. Most obligations are documented on the balance sheet, but some can disclosed off the balance sheet under U.S. GAAP.

JP Morgan Chase and Co. consolidates accounts of JP Morgan Chase and other entities in which the Bank has a controlling financial interest.

The Bank has a number of off-balance sheet arrangements consisting of non-consolidated special-purpose entities (“SPEs”), which are a type of Variable Interest Entity (VIEs), and lending-related financial instruments (e.g., commitments and guarantees). The Bank allocates capital against all SPE-related transactions and related exposures, such as derivative contracts and lending-related commitments and guarantees. The Bank has no commitments to issue its stock to support any SPE transactions, and its policy requires that transactions with SPEs be conducted at a distance and reflect market pricing.

Variable Interest Entities (VIEs)

The Bank deems all of its primary economic interests, including debt and equity investments, servicing fees, derivatives and/or other arrangements to be eligible variable interests in VIEs. The Bank’s other business segments are also involved with VIEs (both third-party and Bank-sponsored) but to a lesser extent. The business segment includes Asset & Wealth Management, Commercial and Corporate.

Bank-sponsored mortgage and other securitization trusts

JP Morgan has securitized its originated and purchased residential mortgages, commercial mortgages and other consumer loans primarily in Consumer and Community Banking (CCB) and Corporate and Investment Banking (CIB) businesses. Depending on the particular transaction and the respective company involved, the Bank may act as the servicer of the loans or retain certain beneficial interests in the securitization trusts.

The table below shows the total unpaid principal amount of assets held in Bank-sponsored private-label securitization entities, including those in which the Bank has continuing involvement, as well as those that are consolidated by the Bank. Continuing involvement includes loan servicing, holding senior interests or subordinated interests (including amounts required to be held according to credit risk retention rules), recourse or guarantee arrangements, and derivative contracts.

(In USD millions)

 

Principal Amount Outstanding

JPMorgan Chase interest in securitized assets in nonconsolidated VIEs

 

Particulars

Total assets held by

securitization VIEs

 Assets held   in   consolidated   securitization   VIEs

 Assets held in   nonconsolidated   securitization   VIEs with   continuing   involvement

 Trading   assets

 Investment   securities

 Other   financial   assets

 Total   interests   held by   JPMorgan   Chase

 

March 31 2020

             

Securitization-related

             

Residential Mortgage:

             

Prime/Alt-A and Option ARMs

59,615

2,657

48,743

       

Subprime

14,198

51

13,024

9

-

-

9

Commercial and Others*

114,032

-

94,361

989

1,197

273

2,459

Total

187,845

2,708

156,128

1,586

2,324

273

4,183

               

December 31 2019

             

Securitization-related

             

Residential Mortgage:

             

Prime/Alt-A and Option ARMs

60,348

2,796

48,734

535

625

 

1,160

Subprime

14,661

-

13,490

7

-

 

7

Commercial and Others*

111,903

-

80,878

785

773

241

1,799

Total

186,912

2,796

143,102

1,327

1,398

241

2,966

                         

*Commercial and Others Consists of securities backed by commercial real estate loans and non-mortgage-related consumer receivables purchased from third parties.

Loan Securitization

JP Morgan Chase and Co. adopted new accounting guidelines for VIEs in 2010. Prior to that, the Bank showed only maximum exposure to loss of VIEs. After the adoption of the new accounting guidelines, it revealed net liquidation losses on the securitized loans. The current net liquidation losses have significantly decreased significantly from the 2012 level. The net liquidation loss for 2019 was only $1,556 million compared to $13,396 million in 2012. The net liquidation loss decreased by 55.9% in 1st quarter of 2020 from the same quarter of the previous year. We expect this number to spike dramatically – considerably more than that of the 2008 – 2012 levels.

(In USD millions)

             

Particulars

December 31 2019

March 31 2020

June 30, 2020, E

September 30, 2020, F

Residential mortgage

Commercial and other

Residential mortgage

Commercial and other

Residential mortgage

Commercial and other

Residential mortgage

Commercial and other

Principal securitized

1,782

764

3,064

3,188

5,379

13,666

9,787

62,399

Q-o-Q Growth

   

71.9%

317.3%

75.5%

328.7%

82.0%

356.6%

Growth Rates

       

5.0%

3.6%

8.5%

8.5%

                             

Losses in VIEs

(In USD millions)

Particulars

Losses in VIEs

2007

2008

2009

2010

2011

2012

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

 

Non-Consolidated

 Non-   Consolidated

 Non-   Consolidated

 Non-   Consolidated

 Non-   Consolidated

 Non-   Consolidated

 Non-   Consolidated

 Non-   Consolidated

 Non-   Consolidated

 Non-   Consolidated

 Non-   Consolidated

Maximum exposure to loss

88,900

56,900

                 

Net liquidation losses

                     

Securitized loans

                     

Residential mortgage:

                     

Prime mortgage

-

-

9,333

6,257

5,650

6,850

157

171

146

105

99

Subprime mortgage

-

-

7,123

3,598

3,086

3,013

144

167

145

76

86

Option ARMs

-

-

2,287

2,305

1,907

2,268

-

-

-

-

-

Commercial and other

-

-

15

618

1,101

1,265

141

24

118

162

10

Total

88,900

56,900

18,758

12,778

11,744

13,396

442

362

409

343

195

Delinquency Rate

The Bank’s loan portfolio is divided into three segments: Consumer excluding credit cards; Credit cards; and Wholesale. The consumer, excluding credit card portfolio segment, includes residential mortgage and home equity loans and lending-related commitments that are combined into a residential real estate class. The table below provides information on delinquency, which is the primary credit quality indicator for retained residential real estate loans.

Residential Real Estate Loan

 (In USD millions)

Particulars

Dec 31-2019

March 31 2020

June 30 2020

September 30 2020

 

Revolving Loans

 

Term Loans by Origination Year

     

Total

Within the revolving period

Converted to term loans

Prior to 2016

2016

2017

2018

2019

Q1 2020

Total

Q2 2020 E

Q3 2020 F

Loan delinquency

                       

Current

239,979

 8,213

 18,927

 67,311

 39,809

 30,504

 21,088

 42,800

 10,590

 239,242

 11,225

 11,899

30–149 days past due

1,910

7

444

1,368

57

33

11

7

-

1,927

561

1,011

150 or more days past due

1,428

13

260

877

9

11

10

-

-

1,180

-

-

Total retained loans

243,317

 8,233

 19,631

 69,556

 39,875

 30,548

 21,109

 42,807

 10,590

 242,349

 11,787

 12,910

% of 30+ days past due to total retained loans

0.80%

0.09%

2.35%

2.03%

0.14%

0.11%

0.05%

0.02%

 

0.81%

5.00%

8.50%

The delinquency rate as of December 31, 2019, was 0.80% and it increased to 0.81% in the 1st quarter of 2020. We have estimated the delinquency rate of residential real estate loan as 5.0% for the 2nd quarter of 2020 and forecasted 8.5% for the 3rd quarter of 2020. The delinquency rate is estimated as per the delinquency rate available for RMBS for May 2020, in the public domain.

Shifting of Assets to Level 3 (2020)

JPMorgan Chase & Co. carries a portion of its total assets and liabilities at fair value. These assets and liabilities are mostly carried at a fair value on recurring basis. Certain assets, liabilities and unfunded lending-related commitments are measured at a fair value on nonrecurring basis; i.e., they are not measured at fair value on an perpetual basis but are subject to fair value adjustments in certain circumstances.

Fair value is based on the quoted market prices or inputs, as available. If prices or quotes are not available, the fair value is based on valuation models and other valuation techniques that consider relevant transaction characteristics (maturity) and use, as inputs, observable or unobservable market parameters, including yield curves, interest rates, volatilities, prices (such as a commodity, equity or debt prices), correlations, foreign exchange rates and credit curves.

A three-level valuation hierarchy has been established under U.S. GAAP for disclosure of the fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. The Bank classifies assets as level 3 when one or more inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following tables include a roll-forward of the Consolidated balance sheets amounts for financial instruments classified by the Bank within level 3 of the fair value hierarchy for the three months ended March 31, 2020, and 2019.

(In USD millions)

Particulars

Fair Value on January 1, 2020

 Total realized/   unrealized   gains/ (losses

 Purchases

 Sales

 Settlements

 Transfers   into   Level  3

 Transfers   out of   Level 3

 Fair   Value   at   March   31,   2020

 Change in   unrealized   gains/(losses)   related to   financial   instruments held   at March. 31 2020

Assets

                 

Trading Assets:

                 

Debt Instruments:

                 

Mortgage-Backed Securities:

                 

U.S. GSEs and government agencies

797

(139)

19

(116)

(42)

-

-

519

(131)

Residential – nonagency

23

(1)

2

-

-

-

-

24

(1)

Commercial – nonagency

4

-

1

-

(1)

1

(2)

3

-

Total mortgage-backed securities

824

(140)

22

(116)

(43)

1

(2)

546

(132)

Obligations of U.S. states and municipalities

10

-

-

(1)

-

-

-

9

-

Non-U.S. government debt securities

155

(12)

90

(57)

-

-

(1)

175

(10)

Corporate debt securities

558

(55)

292

(42)

-

227

(27)

953

(50)

Loans

1,382

(161)

699

(162)

(53)

1,788

(139)

3,354

(190)

Asset-backed securities

37

(2)

36

(15)

(1)

-

(3)

52

(1)

Total debt instruments

2,966

(370)

1,139

(393)

(97)

2,016

(172)

5,089

(383)

Equity Securities

196

(38)

10

(4)

-

82

(33)

213

(39)

Other

232

(1)

9

(5)

(12)

-

(2)

221

2

Total trading assets – debt and equity instruments

3,394

(409)

1,158

(402)

(109)

2,098

(207)

5,523

(420)

Net Derivative Receivables:

                 

Interest

(332)

642

66

(50)

(241)

(172)

(49)

(136)

282

Credit

(139)

108

18

(128)

(33)

60

3

(111)

65

Foreign Exchange

(607)

(339)

38

(4)

(14)

-

(1)

(927)

(508)

Equity

(3,395)

3,037

59

(548)

583

(656)

94

(826)

3,707

Commodity

(16)

(403)

4

(15)

9

(6)

2

(425)

(399)

Total net derivative receivables

(4,489)

3,045

185

(745)

304

(774)

49

(2,425)

3,147

Available for sale securities:

                 

Mortgage-backed securities

1

-

-

-

(1)

-

-

-

-

Asset-backed securities

-

-

-

-

-

-

-

-

-

Total available-for-sale securities

1

-

-

-

(1)

-

-

-

-

Loans

-

(11)

-

-

-

294

-

283

(10)

Mortgage servicing rights

4,699

(1,382)

273

(75)

(248)

-

-

3,267

(1,382)

Other Assets

724

(82)

2

(28)

(200)

-

-

416

(81)

(In USD millions)

Particulars

Fair Value on January 1, 2020

 Total   realized/   unrealized   gains/ (losses

 Purchases

 Sales

 Issuances

 Settlements

 Transfers   into   Level  3

 Transfers   out of   Level 3

 Fair   Value   at   March   31,   2020

 Change in   unrealized   gains/(losses)   related to   financial   instruments   held at March   31 2020

Liabilities:

                   

Deposits

3,360

(149)

-

-

386

(172)

4

(250)

3,179

(135)

Short-term borrowings

1,674

(345)

-

-

1,615

(929)

40

(16)

2,039

(409)

Trading liabilities – debt and equity instruments

41

3

(75)

7

-

-

86

(1)

61

6

Accounts payable and other liabilities

45

(8)

(23)

1

-

-

-

-

15

(7)

Beneficial interests issued by consolidated VIEs

-

-

-

-

-

-

-

-

-

-

Long-term debt

23,339

(4,110)

-

-

4,607

(3,549)

370

(516)

20,141

(3,984)

Shifting of Assets to level 3 (2019)

(In USD millions)

Particulars

Fair Value on January 1, 2019

  Total   realized/     unrealized   gains/ (losses

 Purchases

 Sales

 Settlements

 Transfers   into   Level  3

 Transfers   out of   Level 3

 Fair   Value at   December   31, 2019

 Change in   unrealized   gains/(losses)   related to   financial   instruments   held at   December 31   2019

Assets

                 

Trading Assets:

                 

Debt Instruments:

                 

Mortgage-Backed Securities:

                 

U.S. GSEs and government agencies

549

(62)

773

(310)

(134)

1

(20)

797

(58)

Residential – nonagency

64

25

83

(86)

(20)

15

(58)

23

2

Commercial – nonagency

11

2

20

(26)

(14)

15

(4)

4

1

Total mortgage-backed securities

624

(35)

876

(422)

(168)

31

(82)

824

(55)

Obligations of U.S. states and municipalities

689

13

85

(159)

(8)

-  

(610)

10

13

Non-U.S. government debt securities

155

1

290

(287)

-  

14

(18)

155

4

Corporate debt securities

334

47

437

(247)

(52)

112

(73)

558

40

Loans

1,706

132

727

(708)

(562)

625

(538)

1,382

51

Asset-backed securities

127

-  

37

(93)

(40)

28

(22)

37

(3)

Total debt instruments

3,635

158

2,452

(1,916)

(830)

810

(1,343)

2,966

50

Equity Securities

232

(41)

58

(103)

(22)

181

(109)

196

(18)

Other

301

(36)

50

(26)

(54)

2

(5)

232

91

Total trading assets – debt and equity instruments

4,168

81

2,560

(2,045)

(906)

993

(1,457)

3,394

123

Net Derivative Receivables:

                 

Interest

(38)

(394)

109

(125)

5

(7)

118

(332)

(599)

Credit

(107)

(36)

20

(9)

8

29

(44)

(139)

(127)

Foreign Exchange

(297)

(551)

17

(67)

312

(22)

1

(607)

(380)

Equity

(2,225)

(310)

397

(573)

(503)

(405)

224

(3,395)

(1,608)

Commodity

(1,129)

497

36

(348)

89

(6)

845

(16)

130

Total net derivative receivables

(3,796)

(794)

579

(1,122)

(89)

(411)

1,144

(4,489)

(2,584)

Available for sale securities:

                 

Mortgage-backed securities

1

-

-

-

-

-

-

1

-

Asset-backed securities

-

-

-

-

-

-

-

-

-

Total available-for-sale securities

1

-

-

-

-

-

-

1

-

Loans

122

4

-

-

(125)

-

(1)

-

-

Mortgage servicing rights

6,130

(1,180)

1,489

(789)

(951)

-

-

4,699

(1,180)

Other Assets

927

(198)

194

(165)

(33)

6

(7)

724

(180)

(In USD millions)

Particulars

Fair Value on January 1, 2019

 Total   realized/   unrealized   gains/ (losses

 Purchases

 Sales

 Issuances

 Settlements

 Transfers   into   Level  3

 Transfers   out of   Level 3

 Fair   Value at   December   31, 2019

 Change in   unrealized   gains/(losses)   related to   financial   instruments   held at Dec,   31 2019

Liabilities:

                   

Deposits

4,169

278

-  

-  

916

(806)

12

(1,209)

3,360

307

Short-term borrowings

1,523

229

-  

-  

3,441

(3,356)

85

(248)

1,674

155

Trading liabilities – debt and equity instruments

50

2

(22)

41

-  

1

16

(47)

41

3

Accounts payable and other liabilities

10

(2)

(84)

115

-  

-  

6

-  

45

29

Beneficial interests issued by consolidated VIEs

1

(1)

-  

-  

-  

-  

-  

-  

-  

-  

Long-term debt

19,418

2,815

-  

-  

10,441

(8,538)

651

(1,448)

23,339

2,822

The Level 3 assets as a percentage of the total Bank assets, accounted for at fair value (including assets measured at fair value on non-recurring basis) were 2% at both 31st March, 2020, and 31st December, 2019, respectively. The Level 3 liabilities as a percentage of total Bank liabilities accounted for at fair value (including liabilities measured at a fair value on non-recurring basis) were 8% and 16%, as of 31st March, 2020, and 31st December, 2019, respectively.

Level 3 assets were $19.2 billion as of 31st March, 2020, reflecting an increase of $5.6 billion from 31st  December, 2019, reflective of heightened market volatility and net transfers primarily due to $2.0 billion increase in trading loans, $3.1 billion increase in gross equity derivative receivables and $1.4 billion decreases in MSRs.

During 2019, $31 million of mortgaged backed securities were transferred to level 3 assets, therefore the fair value at December 31st 2019 stood at $824 million. Similarly, in the 1st quarter of 2020, a total of $1 million MBS were transferred to level 3 assets and the fair value stood at $546 million as of 31st March 2020.

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