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Financial Institution: JP Morgan Chase

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Question:

Discuss about the Financial Institution for JP Morgan Chase.

 

Answer:

Influence of Basel III requirements on JP Morgan Chase

Adoption of the requirements of Basel III

Basel III mentions the requirements of minimum capital ratio as well as capital adequacy necessities for different large as well as global banks. Fundamentally, unlike Basel II, Basel III mentions about greater number of necessities of Tier I. However, the minimum level is approximately 4.5% that is essentially 2.5% over and above Basel II and specifically Tier I for particularly JP Morgan Chase is around 13%. Essentially, it is obligatory for the bank to maintain higher and at the same time enhanced coverage of risk. Therefore, in a bid to protect economic as well as financial stress, Basel III obtains the company that has nearly conservation of capital of 2.5%.  Again, during December 31st, 2016, JP Morgan Chase maintains a buffer capital conservation of particularly 6.6% (King and Tarbert 2011).

As such, Basel III also comprises of a necessity of leverage ratio that intended to avert too much expansion. Essentially, the standard/benchmark leverage ratio is approximately 3%. However, by the termination of the period 2016, the leverage ratio of the HP Morgan Chase Bank was registered to be 8.6% that is necessarily greater than the stated criteria of 3%. Apart from this, JP Morgan Chase needs to meet satisfy nearly 6% additional leverage ratio from the period of 1st January in the year 2018, whilst this same ratio for particularly JP Morgan Chase is recorded to be 0.5% more by the year 2016 (Lyngen 2012).

The liquidity coverage ratio of JP Morgan Chase enhanced to minimum level of 100% by 1st January during the year 2017. However, during the same period, the high quality liquid assets referred to as HQLA augmented by around $28 million. As such, it might possibly lead to higher rate of growth in particularly deposit. Essentially, net stable ratio of financing can be considered to be a liquidity dimension and the ratio needs to be equal to minimum 100%. The corporation approximates that it was in complaint with specifically NSFR by the closing of the year 2016 (Elliott 2010).

 

Impact of the Basel III on specifically profitability as well as strategy  

Top US banks counting JP Morgan Chase initiated to adhere to the regulations since the beginning of the year 2014. The main cause is that with increase in the buffer capital, the overall return earned on invested capital decreases. Large banks such as JP Morgan Chase might be more anxious about contracting loan capability as compared to small as well as medium banks. However, under stringent liquidity necessities, long term financing sources might be essentially for our bank (Cosimano and Hakura 2011).

Essentially, Basel III concentrates on management of liquidity. Basically, for satisfying the necessities of the liquidity coverage ratio, diverse commercial banks need to maintain more liquid assets namely cash as well as cash equivalents. Nevertheless, from the viewpoint of generating profit, the securities in addition to asset-assisted securities can evidently bring greater return than the securities where risk weighting coefficient is for the most part is zero  (Cosimano and Hakura 2011). Again, owing to Basel III, banks prefer to select securities whose weighting coefficient is equal to zero and this might direct towards decline in profit. Nonetheless, profitability is the most important aspect for the purpose of controlling financing cost by way of refining the entire core capital. This in turn leads to a situation of dilemma for the bank.

Influence of Basel III on balance sheet of JP Morgan Chase

Management of balance sheet of the bank might possibly be affected intensely by capital, leverage as well as liquidity. Essentially, operating cash is particularly more attractive than specifically non-operating cash. As such, it is possible for the specific bank to particularly precede from non-operating cash specifically the declaration of balance sheet. In the interim period, it might exit specific banks and transfer to off-balance sheet. In order to attain a better performance on net and consistent financing ratio, JP Morgan Chase have the need to possess long term debt or else equity against those assets that are difficult to fund. However, the financing cost might increase by the process of allocation of larger longer term debt to particularly equity (Elliott 2010). As such, regulators also have the capability to analyse whether the specific bank has a suitable size of balance sheet. Since regulatory has not been properly defined, the influences are not properly felt in particularly the banking industry.

 

References

Cosimano, T.F. and Hakura, D., 2011. Bank behavior in response to Basel III: A cross-country analysis.

Elliott, D.J., 2010. Basel III, the Banks, and the Economy. Brookings Institutions.

King, P. and Tarbert, H., 2011. Basel III: an overview. Banking & Financial Services Policy Report, 30(5), pp.1-18.

Lyngen, N., 2012. Basel III: dynamics of state implementation. Harv. Int'l LJ, 53, p.519.

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