JPMC comment letter on Basel 3 Endgame and GSIB Surcharge Proposals

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implementation of prudential requirements following the Global Financial Crisis (GFC) indicates that another increase to required capital-especially of this magnitude-is unwarranted.

JPMC has taken a holistic approach in responding to both the B3 and GSIB Proposals, because they- along with many other components of the capital and broader prudential framework-are inextricably linked. It is impossible to fully respond to one Proposal without examining the other, since the aggregate capital increase arises not only from the structure of the capital stacks and calibration of risk weights in the B3 Proposal, but also from how the B3 Proposal interacts with the Stress Capital Buffer (SCB), the GSIB surcharge, the Countercyclical Capital Buffer (CCyB, if activated above 0%), Total Loss Absorbing Capacity (TLAC), and Long Term Debt (LTD) requirements.

The quantum of capital increase from the Proposals, as well as other impacted requirements, will be more influential on banks' decision-making than any revisions of this nature to date. Far more importantly, the negative consequences of these increases-such as rising costs and/or the reduced availability of credit -are hurdles that are highly likely to have long-lasting effects on consumers and businesses alike. For example, the required capital for undrawn portions of retail lines of credit will increase materially as a result of the B3 Proposal. While this change would appear to only impact credit card loans from banks, the negative effects of fewer American's being able to secure credit card loans will be multiplicative. Specifically, by delaying an American's ability to build a credit history, which credit card loans provide, eventual access to other forms of essential retail credit such as mortgages and car loans may be constrained. As this is only one of many examples of the punitive economic impact these Proposals are likely to have on nearly all aspects of the U.S. economy, it is imperative that the Agencies conduct and publicly disclose a holistic (as defined in Section 1) and accurate impact analysis.

As discussed below, a combination of structural revisions and adjustments to Risk Weighted Assets (RWA) should be made prior to finalizing the Proposals. JPMC's proposed structural revisions include:

• Adjusting the GSIB surcharge for economic growth;
• Reducing the calibration of operational risk RWA;
• Right-sizingthe amount of aggregate required capital for operational risk and market risk across all requirements; and
• Recalibrating the GSIB surcharge to ensure there is no increase in the required dollars of GSIB buffer as a result of the implementation of the final B3 Proposal, as systemic risk is unchanged.

RWA-specific revisions can be achieved in two ways. The first is by modifying risk weights for specific exposures, such as mortgages and certain low risk equity investments in renewable energy. The second type of RWA adjustment can be achieved by aligning the B3 Proposal with sensible changes made by other jurisdictions as further discussed in Section 3.

JPMC's comments are organized as follows:

• Section 1: Impact assessments and the FRB's holistic review
• Section 2: Comparing the B3 Proposal with the current U.S. regulatory capital framework
• Section 3: International inconsistency of capital requirements
• Section 4: Calibration of operational risk RWA
• Section 5: Interplay between RWA and other capital requirements

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• Section 6: Calibration of the GSIB surcharge, and the GSIB Proposal
• Section 7: Capital markets activities
• Section 8: Wholesale exposures
• Section 9: Retail exposures
• Section 10: Securitization exposures
• Section 11: Banking book equity exposures.

Section 1: Impact assessments and the FRB's holistic review

The impact analyses in both Proposals are not truly holistic, do not account for potential effects on consumers and businesses, and are inaccurate in important instances.

In December 2022, the FRB's Vice Chair for Supervision (VCS), Michael Barr, previewed his intention to conduct a holistic review of capital standards, noting that he would be "not looking only at each of the individual parts of capital standards, but also at how those parts may interact with each other-as well as other regulatory requirements-and what their cumulative effect is on safety and soundness and risks to the financial system."5

In a July 2023 speech6 VCS Barr indicated this review was complete, noting that "in sum, I believe that the existing approach to capital requirements is sound. As a result, my proposals build on that foundation." Beyond this speech, neither VCS Barr nor the FRB have provided any details on how the review was conducted or quantitative analysis on its findings. As a result, public respondents to both Proposals have no ability to contextualize what overarching level of capital the Agencies currently deem "sound." Similarly, there is no benchmark for what the Agencies consider to be an appropriate amount of aggregate capital for any given exposure or activity, or what magnitude of future increase may or may not be warranted.

JPMC believes a "holistic review" should, at minimum, account for the following two components:

1. A complete and accurate quantification of the increase to banks' capital requirements that will result from (i) the Proposals, and (ii) other requirements affected by the Proposals-for example, the increase in dollars of capital required under a firm's GSIB surcharge that occurs solely as a result of the B3 Proposal (see Section 5). This analysis should also review the calibration and trajectory of existing requirements, and, finally, must justify why capital increases of this magnitude are warranted; and
2. A comprehensive assessment of how capital increases of this scale will affect households and businesses-and whether the associated economic costs outweigh any potential benefits.

As a grounding principle, the primary goal of capital requirements is to assign an accurate amount of capital to an activity that reflects the risk of that activity. The Proposals would materially increase capital required for nearly all activities, without adequate analysis to support why today's levels are insufficient. In terms of the effects on the end users of banking products, both Proposals contain very limited analysis weighing the costs that such significantly higher capital requirements would pose for households, businesses and the economy as a whole. With respect to the B3 Proposal specifically, the Agencies provide only a high level impact estimate, noting that the B3 Proposal-on a standalone basis-"will

1. Michael S. Barr, "Why Bank Capital Matters," (Dec. 1, 2022),availablehere
2. Michael S. Barr, "Holistic Capital Review," (July 10, 2023),availablehere.

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increase the nation's largest banks' capital requirements by 19%.7 The B3 Proposal's brief discussion of impact gives little-to-no consideration to how the cost and availability of credit and other services provided by banks will be affected, nor to how those cost movements would impact the real economy.

It is also noteworthy that, assuming the Proposals are implemented without change, JPMC's own analysis points to a much larger Common Equity Tier 1 (CET1) capital increase of about 25% or $50 billion 8 (equating to a 30% or $500 billion rise in RWAs). In addition, by the time both Proposals are implemented in 2025, JPMC's capital requirements are projected to have risen by approximately 45% since 2017 when accounting for enacted, proposed, or expected changes across the capital framework. 9

An aggregate increase of this magnitude suggests that we are likely to observe profoundly negative consequences in many parts of the U.S. economy. For example, implications for the mortgage market will be driven not only by elevated credit risk weights, but also by operational risk and securitization components of the B3 Proposal. Importantly, these RWA increases are additive to capital requirements resulting from the SCB, the GSIB surcharge, the CCyB (if activated above 0%), and LTD requirements, all of which are impacted by RWA changes. Similarly, the capital markets activities that serve a foundational role for the U.S. economy will incur higher costs from multiple aspects of the B3 Proposal, including revisions to market risk RWA, Credit Valuation Adjustment (CVA) RWA, counterparty credit risk RWA, and operational risk RWA, notwithstanding the fact that the SCB and the GSIB surcharge already require an over-calibrated amount of capital to be held for the relevant risks.

A substantial rise in banks' capital costs for these and virtually all other activities will result in banks either

(i) reducing the volume of certain products and services provided, or (ii) passing those higher costs on to end users where possible given market considerations. Both of these outcomes are likely to exacerbate the ongoing shift of banking activities to non-bank providers, which is concerning from a financial stability perspective for the following reasons:

• The regulatory framework applicable to large banks is designed to-among other goals-promote the continuity of credit creation and other financial intermediation for end users through the economic cycle. For example, stress tests such as the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Testing (DFAST) exercises, as well as requirements such as the Liquidity Coverage Ratio and TLAC, help ensure banks remain financially prepared (i.e., buffered) to continue providing credit and liquidity in times of stress. While these features may not fully guarantee credit availability in challenging economic environments, having the aggregate banking system buffered for such events clearly benefits households and businesses.

In contrast, credit provided by non-bank financial institutions tends to be more procyclical, as non- banks are more acutely responsive to market conditions and less incentivized relative to banks to continue lending in stress due to their different business models and the lack of regulatory expectations for these providers to be ready to serve clients and customers even in times of stress. Moreover, unlike non-bank financial institutions, the parent company of a bank is generally required to serve as a "source of strength" 10 for its bank subsidiaries, including by committing resources to support those subsidiaries.

1. B3 Proposal, 88 Fed. Reg. at 64169, Footnote 464. ("Largest banks" includes Category I (GSIBs) and II (those with greater than or equal to $700 billion in total assets, or $75 billion in cross jurisdiction activity) banks).
2. Estimated impacts based on JPMC's best understanding of the B3 Proposal, as applied to our balance sheet as of 2Q 2023 with SCB currently in effect, and 1Q 2024 GSIB surcharge. Estimate for operational risk RWA, including internal loss multiplier used, is as of the implementation date. Estimate incorporates no remediation. Estimated RWA impact of >$500B has been rounded down to $500B.
3. 45% estimated aggregate increase reflects constant risk and includes the impact of standardized approach for counterparty credit risk finalized in 2019, the B3 Proposal, the GSIB surcharge Proposal, upward trajectory of the GSIB surcharge attributable to economic growth, and SCB volatility.
4. 12 U.S.C. 1831o-1, requires a Bank Holding Company serve as a "source of strength" for its depository institution subsidiaries.

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• Finally, it has been suggested that activity moving away from the regulated banking sector could reduce systemic risk. The argument assumes that-all else equal-less activity in the banking sector would reduce the systemic footprint of any given bank. This would hypothetically lower broader system-wide contagion should the given bank fail, thereby reducing the need for government assistance in times of stress. Even if this premise were initially accurate, it is improbable that all of this activity would remain outside of the regulated banking system through stress, as non-bank providers are likely to seek financing from banks, re-exposing the system to these risks. Additionally, many non-bank providers have limited access to contingent liquidity sources such as the discount window, increasing the probability that some of these providers may require incremental government assistance in a severe stress event.

Section 2: Comparing the B3 Proposal with the current U.S. regulatory capital framework

The B3 Proposal fundamentally alters the construct of the existing U.S. regulatory capital framework.

The materiality of many of the Agencies' decisions in their proposed implementation of international Basel Committee on Banking Supervision's (BCBS) standards can be better understood when compared against some of the concepts that underpin the current U.S. regulatory capital framework.

Today, Category I and II banks are subject to a dual stack framework for assessing binding risk-based capital requirements. These consist of a stack calculated using the current standardized approach for RWAs, and a stack measured with the internal models-based advanced approach for RWAs. The B3 Proposal would retain the current standardized capital stack, with a revised calibration of market risk RWA (B3 standardized approach). As shown below, the current advanced approach would be eliminated, and replaced with another standardized approach-the Expanded Risk-Based Approach (ERBA).11

11 For ease of illustration, the chart refers to the higher of the two RWA stacks and sets aside the incremental required capital that arises as a result of the SCB only being applicable to the current standardized capital stack.

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As a grounding principle, banks' decision-making is driven predominately by which risk-based capital requirements are most constraining or "binding." Under the existing framework, the current standardized approach stack is JPMC's CET1 binding constraint.

The B3 Proposal would lead to "the most commonly binding capital requirement shift[ing] from the current standardized approach to the expanded risk-based approach."12 In other words, while JPMC calculates minimum CET1 requirements using the advanced approach, over the last 6 years (24 quarterly observations), it has never been JPMC's binding CET1 constraint. In fact, over the same time horizon, the advanced approach has also never been the binding CET1 constraint for Wells Fargo or NortheTrust, and absent Bank of New York Melon, has not been the binding CET1 constraint for any Category I or II firm since the first quarter of 2021.13

This lack of "bindingness" is why many refer to operational and CVA RWA-based capital charges as "new." As shown in the visual on page 5, these risks are not capitalized in the current standardized approach RWA calculation,14 but will be through the B3 Proposal's ERBA capital stack. The addition of these explicit capital charges for operational and CVA risks, together with the Agencies' proposed elimination of modeling for credit risk (see Section 3), are the primary B3 Proposal changes driving the significant increases in aggregate RWA. These combined revisions result in ERBA becoming the overwhelmingly binding risk-based constraint for all Category I and II firms and therefore, will now be one of the primary determinants in JPMC's business decisions.

Section 3: International inconsistency of capital requirements

The B3 Proposal leads to capital increases that are unnecessary to achieve consistency with Basel standards and far in excess of other major jurisdictions.

The B3 Proposal is calibrated in excess of the BCBS' global standards, and even higher compared to other jurisdictions' adoption of those standards. It is possible to implement the 2017 BCBS standards in a manner that does not result in a 25% rise in required capital, while still achieving broad consistency with the BCBS standards. However, at almost every turn, the Agencies have chosen to propose these requirements conservatively-without presenting sufficient analysis or justification-for a U.S. banking system that is already subject to some of the most stringent regulatory requirements in the world.

One of the most punitive decisions made by the Agencies in the B3 Proposal was the elimination of banks' ability to internally model credit risk RWA. The final BCBS standards prescribed that banks could continue to model most credit risk exposures, but that modeled results could not produce a total RWA lower than 72.5% of those calculated using the new standardized approach, or ERBA in the B3 Proposal. With U.S. banks being unable to use credit risk modeling to mitigate a portion of the significantly higher RWA that results from ERBA, these increases effectively become permanent.

In addition to deciding to eliminate credit risk RWA modeling, the Agencies also opted to propose several aspects of the BCBS standards in a more conservative manner without sufficient analysis, including (i) risk weights for certain retail exposures, such as mortgages, auto loans, and consumer loans, (ii) risk weights for equity exposures; and, (iii) flooring the operational risk RWA Internal Loss Multiplier (ILM) at 1.

While JPMC believes the Agencies' 19% capital increase is understated, it is actually still multiples higher than the projected impacts of these requirements in other major jurisdictions including the United Kingdom (UK) and the European Union (EU). The Prudential Regulatory Authority (PRA) estimates that

1. B3 Proposal, 88 Fed. Reg. at 64168.
2. Based on Category I and II banks' disclosed current standardized approach and advanced approach RWAs and CET1 capital from 4Q 2017 - 3Q 2023.
3. As further discussed in Sections 4 and 5, operational and CVA risks are capitalized in the current standardized approach capital stack through the SCB which applies to this stack.

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the overall package of policies would result in a 3.2%15 increase in Tier 1 capital requirements for major UK firms, with the European Banking Authority (EBA) projecting a 9.9%16 rise in Tier 1 requirements for EU firms. For comparison purposes, JPMC estimates the B3 Proposal will increase the firm's Tier 1 capital requirements by about 26%, relative to our estimated CET1 increase of 25%.

The overarching question when calibrating capital requirements is: "What is the appropriate amount of equity to assign to a given activity that accurately reflects the risk of that activity?" It is concerning that essentially all other major jurisdictions have independently arrived at an answer that is substantially lower than the U.S. Agencies-both at an exposure-specific level and in aggregate. The Agencies must publicly analyze the notably higher outcome produced by the U.S. B3 Proposal, and in doing so, must explain why international policymakers with deep technical expertise and supervisory experience have come to materially different conclusions on a number of issues such as those noted below.

• The Agencies' opposition to credit risk modeling is well-documented; however, their decision to eliminate it raises capital requirements multiples more compared to jurisdictions such as the UK and the EU where it was largely retained. In addition to the elimination of credit risk modeling, the B3 Proposal also makes other punitive changes to the capital stacks (see Section 2) that will exacerbate this disparate impact across jurisdictions. ERBA credit risk weights should be reassessed, giving appropriate consideration to the existing advanced approach risk weights being replaced, and acknowledging the aggregate impact of adding standalone operational risk and CVA capital charges to large banks' now binding capital stack;
• The requirement that an investment grade company have publicly traded securities to qualify for a reduced risk was eliminated in the UK and EU; and,
• Haircut floors for SFTs are subject to an evaluation period in the UK and EU to determine if they should ultimately be proposed.

While the capital requirements of the U.S. and other jurisdictions are not completely identical, it is noteworthy that, as part of its B3 Proposal, the PRA "set out its principle not to double count capital requirements for the same risks,"15 recognizing that changes to the overarching capital framework "will need to be adjusted at the same time as the Basel 3.1 standards are implemented to address double counts and changes in RWAs."15 It is essential that the Agencies adopt a similar approach to that of the PRA, so as to reduce the magnitude of unwarranted capital increases resulting from (i) the interplay between the B3 Proposal, the SCB and the GSIB surcharge (see Section 5), and (ii) the calibration of the GSIB surcharge more broadly (see Section 6).

Section 4: Calibration of operational risk RWA

The calibration of operational risk RWA is flawed, and the impact analysis contains a meaningful error.

The combination of the Agencies' proposed elimination of modeling for credit risk, together with the addition of a standalone operational risk RWA17 capital charge is the primary driver of the significant rise in both aggregate RWA and capital requirements. The Agencies estimate that the addition of a standardized operational risk RWA capital charge accounts for an overwhelming majority18 of the increase in banks' capital requirements under the B3 Proposal. Furthermore, the addition of this

1. PRA, "PS17/23 - Implementation of the Basel 3.1 standards near-final part 1 (Dec. 12, 2023), availablehere.
2. EBA, "Basel III Monitoring Exercise - Results Based on Data as of 31 December 2022" (Annex - Analysis of EU Specific Adjustments)" (Sept. 26, 2023),availablehere.
3. As noted throughout, the B3 Proposal also adds a standalone CVA RWA charge to the ERBA capital stack.
4. Agencies estimated the addition of the operational risk charge accounted for ~90% of Category I-IV banks' capital increase under the B3 Proposal (~78% increase for Category I-II). As detailed in the FSF comment letter, the impact among GSIBs equates to ~64% which is driven by the B3 Proposal's underestimation of credit risk RWA on a relative basis.

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standalone requirement also meaningfully raises the dollars of capital required under a firm's GSIB surcharge (RWA x surcharge % = dollars of GSIB capital required; see Section 5).

Despite this degree of materiality, the B3 Proposal does not contain a robust quantitative or qualitative justification for the inclusion of a standalone operational risk RWA calculation in the ERBA capital stack, nor does it make any assessment of whether the ERBA risk weights for credit exposures are accurately calibrated given its inclusion. When the Agencies originally calibrated the risk weights in the current standardized approach, they deemed an explicit operational risk charge unnecessary. Instead the Agencies included a buffer for "risks not easily quantified" such as operational risk in the current standardized credit risk weights.19 This resulted in a framework where the Agencies only required a standalone operational risk capital charge be applied where credit modeling was permitted, namely the advanced approach. As we transition from the current framework to the B3 Proposal's ERBA construct, it would seem reasonable to expect a corresponding reduction of credit risk weights under ERBA to account for the addition of an explicit operational risk RWA charge. The Agencies, however, have not provided guidance or impact analysis to this effect. While the B3 Proposal does reduce risk weights for certain components of credit risk RWAs, a significant portion are either unchanged, or have been increased. Without the Agencies either (i) providing an estimate as to how current standardized credit risk weights have been recalibrated in ERBA to account for the introduction of an explicit operational risk charge, or (ii) publicly communicating that no adjustment was made and providing an appropriate rationale, our ability to comment on this aspect of the B3 Proposal is limited.

The B3 Proposal also fails to accurately assess the impact of operational risk RWA on lending and trading activities. Specifically, the Agencies omitted $1 trillion of RWA associated with the services component of the operational risk calculation. While many products and services incur capital from the Services Component (SC), two of the most notable are lending and trading activities, meaning that the B3 Proposal's stated impact to these activities is both incorrect and materially understated. 20

Additionally, the calculation of operational risk RWA itself is flawed in three significant ways, with the B3 Proposal also failing to provide adequate substantive analysis supporting the calibration of the calculation, or analyzing the effect of the resulting capital increase on U.S. households and businesses.

1. The calibration of the Business Indicator Component (BIC) is heavily dependent on an institution's size. This incorrectly results in large banks holding comparatively more operational risk RWA and, therefore, more capital for the same activities occurring at a smaller firm with less revenue and expense. Specifically, for every dollar of revenue included in the BIC, a large bank that earns more than $30 billion in revenue is assigned approximately 1.5 times more operational risk RWA compared to a bank with less than $1 billion in revenue. This is driven by the BIC multiplier which is significantly larger for bigger banks (18%), versus smaller firms (12%). This BIC multiplier effectively acts as alarge-bank-surcharge, which is further compounded for large banks that are also GSIBs. This compounding effect arises in the computation of required capital, where the large-bank-surcharge from the BIC multiplier in the operational risk RWA calculation is then multiplied by another large-bank-surcharge due to the GSIB surcharge itself. We estimate the combined effect of these two size-based surcharges results in a GSIB needing to hold approximately 2.2 times the amount of capital versus a smaller, non-GSIB bank21 for each dollar of BIC revenue. Therefore, the interaction between the BIC size-based multiplier and the GSIB surcharge effectively results in a large-bank-surcharge-squared.

1. Risk-BasedCapital Guidelines: Implementation of the New Basel Capital Accord, 68 Fed. Reg. at 45,902 (Aug. 4, 2003), availablehere.
2. Francisco Covas, The Trillion Dollar Omission in Vice Chair Barr's Cost Analysis, Bank Policy Institute (Oct. 12, 2023),availablehere.
3. Example assumes for simplicity ILM = 1 for all banks. SCB for the hypothetical comparison non-GSIB bank is assumed to be 2.5%. The average GSIB impact assumes the blended GSIB surcharge for the 8 US GSIBS as of 1Q 2024 and the blended SCB (adjusted for the estimated Basel III Endgame impact), as well as the marginal BI multiplier, weighted by each US GSIB's estimated BIC.

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1. As recognized by the BCBS,22 the SC of the BIC has an outsized impact on banks' fee-based businesses, but the B3 Proposal only provides minimal data with respect to the economic impacts of adding this capital charge, despite the likelihood of it raising the cost of these services for consumers and businesses that rely on them. The types of activities affected include custody, asset and wealth management, investment advisory, underwriting, and payments services, all of which are important to U.S. businesses, households, and the broader economy. In addition to being crucial activities to the U.S. and global economies, they are also a means of revenue diversification for banks."23 Furthermore, wealth and investment management fee-based revenues have been shown to be durable in times of stress, providing stable revenue streams through economic cycles for banks that engage in these activities.
2. U.S. Agencies chose to floor a bank's Internal Loss Multiplier (ILM) at 1, which is more punitive relative to BCBS standards, but without sufficient justification. While JPMC supports removing the ILM floor, setting the ILM equal to one will not address the material over-calibration of operational risk RWA. This is because many large U.S. banks' ILMs are anticipated to be at or near 1 by the time the B3 Proposal becomes effective, assuming these large banks do not have a significant increase in operational risk losses from their current respective levels. Specifically, larger GFC- driven losses will no longer be included in many firms' 10-year loss history, and any reasonable growth in revenue will further lower the ILM. Therefore, all else equal, setting ILM equal to 1 would not result in a significant reduction of capital required for operational risk RWA on the adoption date. Additionally, setting ILM equal to 1 would disproportionately and incongruously benefit banks with higher historical operational losses.

Finally, the B3 Proposal does not quantify the increase of aggregate capital required for operational risk between the SCB, the B3 Proposal, and the GSIB surcharge. As discussed in more detail in Section 5, JPMC's total operational risk capital requirement arising from the binding ERBA capital stack will increase by multiples, without any analysis supporting the need for it. Addressing this over-calibration of capital required for operational risks-both with respect to operational risk RWA and across the capital framework-would meaningfully lower the negative impact of the B3 Proposal on banks' capital requirements. More significantly, negative effects on the wide range of customers that large banks serve would also be reduced.

Importantly, no single recommendation of those noted below would be adequate to reduce the excessive calibration of operational risk capital requirements for large banks as a result of the B3 Proposal. As such, Agencies should adopt an appropriate combination of the below recommendations, in conjunction with adjusting the calibration of operational risk losses included in the SCB, as discussed in Section 5.

Operational risk RWA recommendations(see BPI / ABA comment letter):

1. Adjust the coefficients used to calculate the BIC from the current size-based buckets of 12%, 15%, and 18% to a fixed 12% to reduce the excessive overall calibration of operational risk RWA and the magnified impact of marginal increases in revenue and expenses for larger firms;

1. Basel Committee on Banking Supervision, Consultative Document, Operational risk - Revisions to the simpler approaches, (October 2014),availablehere. ("A small number of banks that are highly specialised in fee businesses have been identified as facing a disproportionately high capital impact under the BI. The problem stems from the structure of the BI, which was designed to capture the operational risk profile of a universal bank and does not lend itself to accurate application in the case of banks engaged predominantly in fee-based activities. The Committee will respond to the issue if it is evidenced by the results of the new data collection exercise").
2. Board of Governors of the Federal Reserve, "Statement by Gov. Michelle W. Bowman," (July 27, 2023), availablehere. ("FRB Governor Bowman explained that "[d]iversification in revenue streams can enhance the stability and resilience of a bank, and excessive capital charges for these revenue-generating activities could create incentives for banks to roll back the progress they have made to diversify revenues").

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1. Allow offsetting of fee income with fee expense and apply specifically calibrated risk weights24 to distinguish between the different levels of operational risk across lines of business; and,
2. Eliminate the ILM floor, and adopt a floating ILM. Also, significantly decrease the loss multiplier for past operational risk losses from 15 times average losses over the preceding 10 years.

Section 5: Interplay between RWA and other capital requirements

The interaction of RWA with other components of the ERBA capital stack is not adequately considered in either Proposal.

Rising levels of RWA associated with the B3 Proposal impact other capital requirements, resulting in additional increases throughout the capital framework that are not evaluated in either Proposal. For example, higher RWA will directly increase the dollars of capital required for, among other things, the GSIB surcharge, despite no change in JPMC's systemic risk. Additionally, many of the activities most punitively impacted by the B3 Proposal are already being substantially capitalized through the SCB. The most pronounced areas of over-calibration between requirements include operational risk, market risk, and the B3 Proposal's interaction with the GSIB surcharge.

1. Operational risk RWA and the SCB (see BPI / ABA comment letter)
   JPMC estimates that we hold approximately $15 billion25 of required operational risk capital embedded in our SCB. With the addition of the operatinal risk RWA capital charge, JPMC will be required to hold another $30 billion, resulting in an aggregate amount of $45 billion in required capital across RWA and the SCB for operational risk.26 As discussed above, it is essential that the Agencies disclose analysis that allows the public to understand why an increase of this magnitude is warranted, and that the associated economic costs and benefits have been appropriately considered.
   There is also no meaningful assessment of the economic impacts that are likely to occur following the introduction of a standardized operational risk RWA capital charge, particularly when combined with the impact of eliminating credit risk RWA modeling (see Section 3). Absent publicly disclosed data to support why JPMC's required capital for operational risk should increase by multiples within its binding capital stack, the treatment of these risks through RWA, SCB, and ultimately the GSIB surcharge must be re-examined.
2. Market risk RWA, CVA RWA, and the SCB (see ISDA / SIFMA and BPI / ABA comment letters)

The proposed market risk RWA framework consists of two approaches: an internal models approach which "replaces Value at Risk (VaR) and stressed VaR with a single Expected Shortfall (ES) metric that is calibrated to a period of significant market stress,"27 and the new standardized approach for market risk, which "conceptually is similar to a stress test…where [standardized] risk weights have been calibrated to stressed market conditions."27 With this revised calibration of market risk RWA, it is essential that the Agencies acknowledge the degree to which these risks are already capitalized through the Global Market Shock (GMS) component of stress testing and the SCB-and justify why a significant rise in the overall capital required for these risks is warranted.

1. BPI ABA B3 Proposal response, Section 5B, Figure 1, pg. 94, (Jan. 16, 2024),availablehere.
2. Estimate for operational risk losses calculated as follows: Federal Reserve nine-quarter operational risk losses of $185B for all CCAR banks allocated pro-rata based on total assets and adjusted for a 50% haircut to reflect timing of peak stress occurring prior to the end of nine quarters. Applying this to JPM: $185B x 17% x 50% = ~$15B.
3. Estimated B3E impacts based on JPMC's best understanding of the B3 Proposal applied to our balance sheet as of 2Q 2023, with SCB currently in effect, and 1Q 2024 GSIB surcharge. Estimate of operational risk RWA, including ILM used, is as of implementation date. Estimate does not incorporate remediation, and numbers are rounded for ease of illustration.
4. Basel Committee on Banking Supervision, Explanatory note on the minimum capital requirements for market risk, (Jan. 2019)availablehere.

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