Key facts
- JP Morgan's CET1 ratio was constrained by standardized capital calculations in the second quarter.
- Regulator-set risk-weighted assets (RWAs) for JP Morgan increased by over $100 billion.
- JP Morgan is the last of eight US global systemically important banks to be constrained by the standardized RWA approach.
- The standardized approach uses fixed risk weights instead of internal bank models.
- An increase in standardized RWAs can impact capital ratios and require higher capital holdings.
In the second quarter, JP Morgan's Common Equity Tier 1 (CET1) ratio was constrained by the standardized capital calculation. This constraint emerged following a significant increase in the bank's regulator-set risk-weighted assets (RWAs), which rose by over $100 billion. This development positions JP Morgan as the final among the eight US global systemically important banks to experience limitations due to this standardized RWA approach.
The standardized approach to calculating RWAs, as mandated by regulators, does not allow banks to use their own internal models for risk assessment. Instead, it applies a fixed set of risk weights to different asset classes. When RWAs increase under this standardized method, it directly impacts a bank's capital ratios, potentially requiring them to hold more capital against their assets. This contrasts with the internal ratings-based (IRB) approach, where banks can use their own sophisticated models to determine RWAs, often resulting in lower capital requirements if the models demonstrate lower risk.