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Allowance for Credit Losses
 12 Months Ended
Dec. 31, 2018
Allowance for Credit Losses [Abstract]  
Allowance for Credit Losses Allowance for credit losses
JPMorgan Chase’s allowance for loan losses represents management’s estimate of probable credit losses inherent in the Firm’s retained loan portfolio, which consists of the two consumer portfolio segments (primarily scored) and the wholesale portfolio segment (risk-rated). The allowance for loan losses includes a formula-based component, an asset-specific component, and a component related to PCI loans, as described below. Management also estimates an allowance for wholesale and certain consumer lending-related commitments using methodologies similar to those used to estimate the allowance on the underlying loans.
The Firm’s policies used to determine its allowance for credit losses are described in the following paragraphs.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowances for loan losses and lending-related commitments in future periods. At least quarterly, the allowance for credit losses is reviewed by the CRO, the CFO and the Controller of the Firm. As of December 31, 2018, JPMorgan Chase deemed the allowance for credit losses to be appropriate and sufficient to absorb probable credit losses inherent in the portfolio.
Formula-based component
The formula-based component is based on a statistical calculation to provide for incurred credit losses in all consumer loans and performing risk-rated loans. All loans restructured in TDRs as well as any impaired risk-rated loans have an allowance assessed as part of the asset-specific component, while PCI loans have an allowance assessed as part of the PCI component. Refer to Note 12 for more information on TDRs, Impaired loans and PCI loans.
Formula-based component - Consumer loans and certain lending-related commitments
The formula-based allowance for credit losses for the consumer portfolio segments is calculated by applying statistical credit loss factors (estimated PD and loss severities) to the recorded investment balances or loan-equivalent amounts of pools of loan exposures with similar risk characteristics over a loss emergence period to arrive at an estimate of incurred credit losses. Estimated loss emergence periods may vary by product and may change over time; management applies judgment in estimating loss emergence periods, using available credit information and trends. In addition, management applies judgment to the statistical loss estimates for each loan portfolio category, using delinquency trends and other risk characteristics to estimate the total incurred credit losses in the portfolio. Management uses additional statistical methods and considers actual portfolio performance, including actual losses recognized on defaulted loans and collateral valuation trends, to review the appropriateness of the primary statistical loss estimate. The economic impact of
potential modifications of residential real estate loans is not included in the statistical calculation because of the uncertainty regarding the type and results of such modifications.
The statistical calculation is then adjusted to take into consideration model imprecision, external factors and current economic events that have occurred but that are not yet reflected in the factors used to derive the statistical calculation; these adjustments are accomplished in part by analyzing the historical loss experience for each major product segment. However, it is difficult to predict whether historical loss experience is indicative of future loss levels. Management applies judgment in making this adjustment, taking into account uncertainties associated with current macroeconomic and political conditions, quality of underwriting standards, borrower behavior, and other relevant internal and external factors affecting the credit quality of the portfolio. In certain instances, the interrelationships between these factors create further uncertainties. The application of different inputs into the statistical calculation, and the assumptions used by management to adjust the statistical calculation, are subject to management judgment, and emphasizing one input or assumption over another, or considering other inputs or assumptions, could affect the estimate of the allowance for credit losses for the consumer credit portfolio.
Overall, the allowance for credit losses for consumer portfolios is sensitive to changes in the economic environment (e.g., unemployment rates), delinquency rates, the realizable value of collateral (e.g., housing prices), FICO scores, borrower behavior and other risk factors. While all of these factors are important determinants of overall allowance levels, changes in the various factors may not occur at the same time or at the same rate, or changes may be directionally inconsistent such that improvement in one factor may offset deterioration in another. In addition, changes in these factors would not necessarily be consistent across all geographies or product types. Finally, it is difficult to predict the extent to which changes in these factors would ultimately affect the frequency of losses, the severity of losses or both.
Formula-based component - Wholesale loans and lending-related commitments
The Firm’s methodology for determining the allowance for loan losses and the allowance for lending-related commitments involves the early identification of credits that are deteriorating. The formula-based component of the allowance for wholesale loans and lending-related commitments is calculated by applying statistical credit loss factors (estimated PD and LGD) to the recorded investment balances or loan-equivalent over a loss emergence period to arrive at an estimate of incurred credit losses in the portfolio. Estimated loss emergence periods may vary by the funded versus unfunded status of the instrument and may change over time.
The Firm assesses the credit quality of a borrower or counterparty and assigns a risk rating. Risk ratings are assigned at origination or acquisition, and if necessary, adjusted for changes in credit quality over the life of the exposure. In assessing the risk rating of a particular loan or lending-related commitment, among the factors considered are the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. These factors are based on an evaluation of historical and current information and involve subjective assessment and interpretation. Determining risk ratings involves significant judgment; emphasizing one factor over another or considering additional factors could affect the risk rating assigned by the Firm.
A PD estimate is determined based on the Firm’s history of defaults over more than one credit cycle.
LGD estimate is a judgment-based estimate assigned to each loan or lending-related commitment. The estimate represents the amount of economic loss if the obligor were to default. The type of obligor, quality of collateral, and the seniority of the Firm’s lending exposure in the obligor’s capital structure affect LGD.
The Firm applies judgment in estimating PD, LGD, loss emergence period and loan-equivalent used in calculating the allowance for credit losses. Estimates of PD, LGD, loss emergence period and loan-equivalent used are subject to periodic refinement based on any changes to underlying external or Firm-specific historical data. Changes to the time period used for PD and LGD estimates could also affect the allowance for credit losses. The use of different inputs, estimates or methodologies could change the amount of the allowance for credit losses determined appropriate by the Firm.
In addition to the statistical credit loss estimates applied to the wholesale portfolio, management applies its judgment to adjust the statistical estimates for wholesale loans and lending-related commitments, taking into consideration model imprecision, external factors and economic events that have occurred but are not yet reflected in the loss factors. Historical experience of both LGD and PD are
considered when estimating these adjustments. Factors related to concentrated and deteriorating industries also are incorporated where relevant. These estimates are based on management’s view of uncertainties that relate to current macroeconomic conditions, quality of underwriting standards and other relevant internal and external factors affecting the credit quality of the current portfolio.
Asset-specific component
The asset-specific component of the allowance relates to loans considered to be impaired, which includes loans that have been modified in TDRs as well as risk-rated loans that have been placed on nonaccrual status. To determine the asset-specific component of the allowance, larger risk-rated loans (primarily loans in the wholesale portfolio segment) are evaluated individually, while smaller loans (both risk-rated and scored) are evaluated as pools using historical loss experience for the respective class of assets.
The Firm generally measures the asset-specific allowance as the difference between the recorded investment in the loan and the present value of the cash flows expected to be collected, discounted at the loan’s original effective interest rate. Subsequent changes in impairment are reported as an adjustment to the allowance for loan losses. In certain cases, the asset-specific allowance is determined using an observable market price, and the allowance is measured as the difference between the recorded investment in the loan and the loan’s fair value. Collateral-dependent loans are charged down to the fair value of collateral less costs to sell. For any of these impaired loans, the amount of the asset-specific allowance required to be recorded, if any, is dependent upon the recorded investment in the loan (including prior charge-offs), and either the expected cash flows or fair value of collateral. Refer to Note 12 for more information about charge-offs and collateral-dependent loans.
The asset-specific component of the allowance for impaired loans that have been modified in TDRs (including forgone interest, principal forgiveness, as well as other concessions) incorporates the effect of the modification on the loan’s expected cash flows, which considers the potential for redefault. For residential real estate loans modified in TDRs, the Firm develops product-specific probability of default estimates, which are applied at a loan level to compute expected losses. In developing these probabilities of default, the Firm considers the relationship between the credit quality characteristics of the underlying loans and certain assumptions about home prices and unemployment, based upon industry-wide data. The Firm also considers its own historical loss experience to-date based on actual redefaulted modified loans. For credit card loans modified in TDRs, expected losses incorporate projected redefaults based on the Firm’s historical experience by type of modification program. For wholesale loans modified in TDRs, expected losses incorporate management’s expectation of the borrower’s ability to repay under the modified terms.
Estimating the timing and amounts of future cash flows is highly judgmental as these cash flow projections rely upon estimates such as loss severities, asset valuations, default rates (including redefault rates on modified loans), the amounts and timing of interest or principal payments (including any expected prepayments) or other factors that are reflective of current and expected market conditions. These estimates are, in turn, dependent on factors such as the duration of current overall economic conditions, industry-, portfolio-, or borrower-specific factors, the expected outcome of insolvency proceedings as well as, in certain circumstances, other economic factors, including the level of future home prices. All of these estimates and assumptions require significant management judgment and certain assumptions are highly subjective.
PCI loans
In connection with the acquisition of certain PCI loans, which are accounted for as described in Note 12, the allowance for loan losses for the PCI portfolio is based on quarterly estimates of the amount of principal and interest cash flows expected to be collected over the estimated remaining lives of the loans.
These cash flow projections are based on estimates regarding default rates (including redefault rates on modified loans), loss severities, the amounts and timing of prepayments and other factors that are reflective of current and expected future market conditions. These estimates are dependent on assumptions regarding the level of future home prices, and the duration of current overall economic conditions, among other factors. These estimates and assumptions require significant management judgment and certain assumptions are highly subjective.
Allowance for credit losses and related information
The table below summarizes information about the allowances for loan losses and lending-relating commitments, and includes a breakdown of loans and lending-related commitments by impairment methodology.
(Table continued on next page)
 
 
 
 
 
 
 
 
 
2018
 
Year ended December 31,
(in millions)
Consumer,
excluding
credit card
 
Credit card
 
Wholesale
 
Total
 
Allowance for loan losses
 
 
 
 
 
 
 
 
Beginning balance at January 1,
$
4,579

 
$
4,884

 
$
4,141

 
$
13,604

 
Gross charge-offs
1,025


5,011

 
313

 
6,349

 
Gross recoveries
(842
)
 
(493
)
 
(158
)
 
(1,493
)
 
Net charge-offs
183


4,518

 
155

 
4,856

 
Write-offs of PCI loans(a)
187

 
—

 
—

 
187

 
Provision for loan losses
(63
)
 
4,818

 
130

 
4,885

 
Other
—


—

 
(1
)
 
(1
)
 
Ending balance at December 31,
$
4,146

 
$
5,184

 
$
4,115

 
$
13,445

 
 
 
 
 
 
 
 
 
 
Allowance for loan losses by impairment methodology
 
 
 
 
 
 
 
 
Asset-specific(b)
$
196

 
$
440

(c) 
$
297

 
$
933

 
Formula-based
2,162

 
4,744

 
3,818

 
10,724

 
PCI
1,788

 
—

 
—

 
1,788

 
Total allowance for loan losses
$
4,146

 
$
5,184

 
$
4,115

 
$
13,445

 
 
 
 
 
 
 
 
 
 
Loans by impairment methodology
 
 
 
 
 
 
 
 
Asset-specific
$
6,828

 
$
1,319

 
$
1,250

 
$
9,397

 
Formula-based
342,775

 
155,297

 
437,909

 
935,981

 
PCI
24,034

 
—

 
3

 
24,037

 
Total retained loans
$
373,637

 
$
156,616

 
$
439,162

 
$
969,415

 
 
 
 
 
 
 
 
 
 
Impaired collateral-dependent loans
 
 
 
 
 
 
 
 
Net charge-offs
$
24


$
—

 
$
21

 
$
45

 
Loans measured at fair value of collateral less cost to sell
2,080

 
—

 
202

 
2,282

 
 
 
 
 
 
 
 
 
 
Allowance for lending-related commitments
 
 
 
 
 
 
 
 
Beginning balance at January 1,
$
33

 
$
—

 
$
1,035

 
$
1,068

 
Provision for lending-related commitments
—

 
—

 
(14
)
 
(14
)
 
Other
—

 
—

 
1

 
1

 
Ending balance at December 31,
$
33

 
$
—

 
$
1,022

 
$
1,055

 
 
 
 
 
 
 
 
 
 
Allowance for lending-related commitments by impairment methodology
 
 
 
 
 
 
 
 
Asset-specific
$
—

 
$
—

 
$
99

 
$
99

 
Formula-based
33

 
—

 
923

 
956

 
Total allowance for lending-related commitments
$
33

 
$
—

 
$
1,022

 
$
1,055

 
 
 
 
 
 
 
 
 
 
Lending-related commitments by impairment methodology
 
 
 
 
 
 
 
 
Asset-specific
$
—

 
$
—

 
$
469

 
$
469

 
Formula-based
46,066

 
605,379

 
387,344

 
1,038,789

 
Total lending-related commitments
$
46,066

 
$
605,379

 
$
387,813

 
$
1,039,258

 
(a)
Write-offs of PCI loans are recorded against the allowance for loan losses when actual losses for a pool exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. A write-off of a PCI loan is recognized when the underlying loan is removed from a pool.
(b)
Includes risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a TDR.
(c)
The asset-specific credit card allowance for loan losses is related to loans that have been modified in a TDR; such allowance is calculated based on the loans’ original contractual interest rates and does not consider any incremental penalty rates.








(table continued from previous page)
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
 
Consumer,
excluding
credit card
 
Credit card
 
Wholesale
 
Total
 
Consumer,
excluding
credit card
 
Credit card
 
Wholesale
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
5,198

 
$
4,034

 
$
4,544

 
$
13,776

 
$
5,806

 
$
3,434

 
$
4,315

 
$
13,555

 
1,779

 
4,521

 
212

 
6,512

 
1,500

 
3,799

 
398

 
5,697

 
(634
)
 
(398
)
 
(93
)
 
(1,125
)
 
(591
)
 
(357
)
 
(57
)
 
(1,005
)
 
1,145

 
4,123

 
119

 
5,387

 
909

 
3,442

 
341

 
4,692

 
86

 
—

 
—

 
86

 
156

 
—

 
—

 
156

 
613

 
4,973

 
(286
)
 
5,300

 
467

 
4,042

 
571

 
5,080

 
(1
)
 
—

 
2

 
1

 
(10
)
 
—

 
(1
)
 
(11
)
 
$
4,579

 
$
4,884

 
$
4,141

 
$
13,604

 
$
5,198

 
$
4,034

 
$
4,544

 
$
13,776

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
246

 
$
383

(c) 
$
461

 
$
1,090

 
$
308

 
$
358

(c) 
$
342

 
$
1,008

 
2,108

 
4,501

 
3,680

 
10,289

 
2,579

 
3,676

 
4,202

 
10,457

 
2,225

 
—

 
—

 
2,225

 
2,311

 
—

 
—

 
2,311

 
$
4,579

 
$
4,884

 
$
4,141

 
$
13,604

 
$
5,198

 
$
4,034

 
$
4,544

 
$
13,776

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
8,036

 
$
1,215

 
$
1,867

 
$
11,118

 
$
8,940

 
$
1,240

 
$
2,017

 
$
12,197

 
333,941

 
148,172

 
401,028

 
883,141

 
319,787

 
140,471

 
381,770

 
842,028

 
30,576

 
—

 
3

 
30,579

 
35,679

 
—

 
3

 
35,682

 
$
372,553

 
$
149,387

 
$
402,898

 
$
924,838

 
$
364,406

 
$
141,711

 
$
383,790

 
$
889,907

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
64

 
$
—

 
$
31

 
$
95

 
$
98

 
$
—

 
$
7

 
$
105

 
2,133

 
—

 
233

 
2,366

 
2,391

 
—

 
300

 
2,691

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
26

 
$
—

 
$
1,052

 
$
1,078

 
$
14

 
$
—

 
$
772

 
$
786

 
7

 
—

 
(17
)
 
(10
)
 
—

 
—

 
281

 
281

 
—

 
—

 
—

 
—

 
12

 
—

 
(1
)
 
11

 
$
33

 
$
—

 
$
1,035

 
$
1,068

 
$
26

 
$
—

 
$
1,052

 
$
1,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
—

 
$
—

 
$
187

 
$
187

 
$
—

 
$
—

 
$
169

 
$
169

 
33

 
—

 
848

 
881

 
26

 
—

 
883

 
909

 
$
33

 
$
—

 
$
1,035

 
$
1,068

 
$
26

 
$
—

 
$
1,052

 
$
1,078

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
—

 
$
—

 
$
731

 
$
731

 
$
—

 
$
—

 
$
506

 
$
506

 
48,553

 
572,831

 
369,367

 
990,751

 
53,247

 
553,891

 
367,508

 
974,646

 
$
48,553

 
$
572,831

 
$
370,098

 
$
991,482

 
$
53,247

 
$
553,891

 
$
368,014

 
$
975,152