Question

You are a financial manager of a major U.S.-based financial institution of your choosing. Go to the company's Web site (e.g., JPMorgan Chase, Wells Fargo, U.S. Bancorp). Pull its 2 most recent annual reports. In the annual report, you will see the balance sheet. You have been asked to provide a report to the company, in which you will include the following:

• Discuss major balance sheet numbers (e.g., Total Assets, Total Liabilities, Total Equity) and how these changed over the past 2 years. Refer to your textbook as needed.
• Discuss the potential credit risk, interest rate risk, and operational risk as they pertain to the selected financial institution. Use supporting numbers from the balance sheets.

Answer 1

Financial Highlights As of or for the year ended December 31, (in millions, except per share, ratio data and headcount) 2018 2017 2016 Reported basis(a) Total net revenue $ 109,029 $ 100,705 $ 96,569 Total noninterest expense 63,394 59,515 56,672 Pre-provision profit 45,635 41,190 39,897 Provision for credit losses 4,871 5,290 5,361 Net income $ 32,474 $ 24,441 $ 24,733 Per common share data Net income per share: Basic $ 9.04 $ 6.35 $ 6.24 Diluted 9.00 6.31 6.19 Cash dividends declared 2.72 2.12 1.88 Book value 70.35 67.04 64.06 Tangible book value (TBVPS)(b) 56.33 53.56 51.44 Selected ratios Return on common equity 13% 10% 10% Return on tangible common equity (ROTCE)(b) 17 12 13 Common equity Tier 1 capital ratio(c) 12.0 12.1 12.2 Tier 1 capital ratio(c) 13.7 13.8 13.9 Total capital ratio(c) 15.5 15.7 15.2 Selected balance sheet data (period-end) Loans $ 984,554 $ 930,697 $ 894,765 Total assets 2,622,532 2,533,600 2,490,972 Deposits 1,470,666 1,443,982 1,375,179 Common stockholders’ equity 230,447 229,625 228,122 Total stockholders’ equity 256,515 255,693 254,190 Market data Closing share price $ 97.62 $ 106.94 $ 86.29 Market capitalization 319,780 366,301 307,295 Common shares at period-end 3,275.8 3,425.3 3,561.2 Headcount 256,105 252,539 243,355 (a) Results are presented in accordance with accounting principles generally accepted in the United States of America, except where otherwise noted. (b) TBVPS and ROTCE are each non-GAAP financial measures. For further discussion of these measures, refer to Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures and Key Financial Performance Measures on pages 57–59. (c) The ratios presented are calculated under the Basel III Fully Phased-In Approach, and they are key regulatory capital measures. For further discussion, refer to “Capital Risk Management” on pages 85-94. JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $2.6 trillion and operations worldwide. The firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing and asset management. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of customers in the United States and many of the world’s most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands.

The Corporate & Investment Bank, which consists of Banking and Markets & Investor Services, offers a broad suite of investment banking, market-making, prime brokerage, and treasury and securities products and services to a global client base of corporations, investors, financial institutions, government and municipal entities. Banking offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication. Banking also includes Treasury Services, which provides transaction services, consisting of cash management and liquidity solutions. Markets & Investor Services is a global market-maker in cash securities and derivative instruments, and also offers sophisticated risk management solutions, prime brokerage, and research. Markets & Investor Services also includes Securities Services, a leading global custodian which provides custody, fund accounting and administration, and securities lending products principally for asset managers, insurance companies and public and private investment funds. Effective January 1, 2018, the Firm adopted several new accounting standards; the guidance which had the most significant impact on the CIB segment results was revenue recognition, and recognition and measurement of financial assets. The revenue recognition guidance was applied retrospectively and, accordingly, prior period amounts were revised. For additional information, refer to Note 1. Selected income statement data Year ended December 31, (in millions) 2018 2017 2016 Revenue Investment banking fees $ 7,473 $ 7,356 $ 6,548 Principal transactions 12,271 10,873 11,089 Lending- and deposit-related fees 1,497 1,531 1,581 Asset management, administration and commissions 4,488 4,207 4,062 All other income 1,239 572 1,169 Noninterest revenue 26,968 24,539 24,449 Net interest income 9,480 10,118 10,891 Total net revenue(a)(b) 36,448 34,657 35,340 Provision for credit losses (60) (45) 563 Noninterest expense Compensation expense 10,215 9,531 9,540 Noncompensation expense 10,703 9,876 9,576 Total noninterest expense 20,918 19,407 19,116 Income before income tax expense 15,590 15,295 15,661 Income tax expense 3,817 4,482 4,846 Net income(a) $ 11,773 $ 10,813 $ 10,815 (a) The full year 2017 results reflect the impact of the enactment of the TCJA including a decrease to net revenue of $259 million and a benefit to net income of $141 million. For additional information related to the impact of the TCJA, refer to Note 24. (b) Included tax-equivalent adjustments, predominantly due to income tax credits related to alternative energy investments; income tax credits and amortization of the cost of investments in affordable housing projects; and tax-exempt income from municipal bonds of $1.7 billion, $2.4 billion and $2.0 billion for the years ended December 31, 2018, 2017 and 2016, respectively. Selected income statement data Year ended December 31, (in millions, except ratios) 2018 2017 2016 Financial ratios Return on equity 16% 14% 16% Overhead ratio 57 56 54 Compensation expense as percentage of total net revenue 28 28 27 Revenue by business Investment Banking $ 6,987 $ 6,852 $ 6,074 Treasury Services 4,697 4,172 3,643 Lending 1,298 1,429 1,208 Total Banking 12,982 12,453 10,925 Fixed Income Markets 12,706 12,812 15,259 Equity Markets 6,888 5,703 5,740 Securities Services 4,245 3,917 3,591 Credit Adjustments & Other(a) (373) (228) (175) Total Markets & Investor Services 23,466 22,204 24,415 Total net revenue $36,448 $34,657 $35,340 (a) Consists primarily of credit valuation adjustments (“CVA”) managed centrally within CIB and funding valuation adjustments (“FVA”) on derivatives. Results are primarily reported in principal transactions revenue. Results are presented net of associated hedging activities and net of CVA and FVA amounts allocated to Fixed Income Markets and Equity Markets. For additional information, refer to Notes 2, 3 and 23. 2018 compared with 2017 Net income was $11.8 billion, up 9%. Net revenue was $36.4 billion, up 5%. Banking revenue was $13.0 billion, up 4%. Investment Banking revenue was $7.0 billion, up 2% compared to a strong prior year, predominantly driven by higher advisory and equity underwriting fees, predominantly offset by lower debt underwriting fees. The Firm maintained its #1 ranking for Global Investment Banking fees with overall share gains, according to Dealogic. Advisory fees were $2.5 billion, up 17%, driven by a higher number of large completed transactions. Equity underwriting fees were $1.7 billion, up 15% driven by a higher share of fees reflecting strong performance across products. Debt underwriting fees were $3.3 billion, down 12%, compared to a strong prior year, primarily driven by declines in industry-wide fee levels. Treasury Services revenue was $4.7 billion, up 13%, driven by the impact of higher interest rates and growth in operating deposits as well as higher fees on increased payments volume. Lending revenue was $1.3 billion, down JPMorgan Chase & Co./2018 Form 10-K 67 9%, driven by lower net interest income primarily reflecting a change in the portfolio mix and overall spread compression, and higher gains in the prior year on securities received from restructurings. Markets & Investor Services revenue was $23.5 billion, up 6%. The results included a reduction of approximately $620 million in tax-equivalent adjustments as a result of the TCJA, and approximately $500 million of fair value gains in the first quarter of 2018 related to the adoption of the new recognition and measurement accounting guidance for certain equity investments previously held at cost. Prior year results included a reduction of $259 million resulting from the enactment of the TCJA. Fixed Income Markets revenue was $12.7 billion, down 1%. Excluding the impact of the TCJA and fair value gains mentioned above, Fixed Income Markets revenue was down 2%. Rates and Credit revenue declined reflecting challenging market conditions in the fourth quarter of 2018 while lower revenue in Fixed Income Financing was driven by compressed margins. This decline was predominantly offset by strong performance including higher client activity in Currencies & Emerging Markets, and higher Commodities revenue compared to a challenging prior year. Equity Markets revenue was $6.9 billion, up 21%, or up 18% excluding the fair value loss of $143 million on a margin loan to a single client in the prior year, driven by strength across derivatives, prime brokerage and cash equities, reflecting strong client activity. Securities Services revenue was $4.2 billion, up 8%, driven by fee growth, higher interest rates and operating deposit growth partially offset by the impact of a business exit. Credit Adjustments & Other was a loss of $373 million, largely driven by higher funding spreads on derivatives. The provision for credit losses was a benefit of $60 million, driven by a reduction in the allowance for credit losses in the first quarter of 2018 related to a single name in the Oil & Gas portfolio, predominantly offset by other net portfolio activity, which includes additions to the allowance for credit losses from select client downgrades. The prior year was a benefit of $45 million primarily driven by a net reduction in the allowance for credit losses in the Oil & Gas and Metals & Mining portfolios partially offset by a net increase in the allowance for credit losses for a single client. Noninterest expense was $20.9 billion, up 8%, predominantly driven by investments in technology and bankers, higher performance-related compensation expense, volume-related transaction costs, and legal expense. 2017 compared with 2016 Net income was $10.8 billion, flat compared with the prior year, reflecting lower net revenue and higher noninterest expense, offset by a lower provision for credit losses, and a tax benefit resulting from the vesting of employee sharebased awards. The current year included a $141 million benefit to net income as a result of the enactment of the TCJA. Net revenue was $34.7 billion, down 2%. Banking revenue was $12.5 billion, up 14% compared with the prior year. Investment banking revenue was $6.9 billion, up 13% from the prior year, driven by higher debt and equity underwriting fees. The Firm maintained its #1 ranking for Global Investment Banking fees, according to Dealogic. Debt underwriting fees were $3.7 billion, up 16% driven by a higher share of fees and an overall increase in industry-wide fees; the Firm maintained its #1 ranking globally in fees across high-grade, high-yield, and loan products. Equity underwriting fees were $1.5 billion, up 21% driven by growth in industry-wide issuance including a strong IPO market; the Firm ranked #2 in equity underwriting fees globally. Advisory fees were $2.2 billion, up 2%; the Firm maintained its #2 ranking for M&A. Treasury Services revenue was $4.2 billion, up 15%, driven by the impact of higher interest rates and growth in operating deposits. Lending revenue was $1.4 billion, up 18% from the prior year, reflecting lower fair value losses on hedges of accrual loans. Markets & Investor Services revenue was $22.2 billion, down 9% from the prior year. Fixed Income Markets revenue was $12.8 billion, down 16%, as lower revenue across products was driven by sustained low volatility, tighter credit spreads, and the impact from the TCJA on taxoriented investments of $259 million, against a strong prior year. Equity Markets revenue was $5.7 billion, down 1% from the prior year, and included a fair value loss of $143 million on a margin loan to a single client. Excluding the fair value loss, Equity Markets revenue was higher driven by higher revenue in Prime Services and cash equities, partially offset by lower revenue in derivatives. Securities Services revenue was $3.9 billion, up 9%, driven by the impact of higher interest rates and deposit growth, as well as higher asset-based fees driven by higher market levels. Credit Adjustments & Other was a loss of $228 million, driven by valuation adjustments. The provision for credit losses was a benefit of $45 million, which included a net reduction in the allowance for credit losses driven by the Oil & Gas and Metals & Mining portfolios partially offset by a net increase in the allowance for credit losses for a single client. The prior year was an expense of $563 million, which included an addition to the allowance for credit losses driven by the Oil & Gas and Metals & Mining portfolios. Noninterest expense was $19.4 billion, up 2% compared with the prior year. Management’s discussion and analysis 68 JPMorgan Chase & Co./2018 Form 10-K Selected metrics As of or for the year ended December 31, (in millions, except headcount) 2018 2017 2016 Selected balance sheet data (period-end) Assets $ 903,051 $ 826,384 $ 803,511 Loans: Loans retained(a) 129,389 108,765 111,872 Loans held-for-sale and loans at fair value 13,050 4,321 3,781 Total loans 142,439 113,086 115,653 Core loans 142,122 112,754 115,243 Equity 70,000 70,000 64,000 Selected balance sheet data (average) Assets $ 922,758 $ 857,060 $ 815,321 Trading assets-debt and equity instruments 349,169 342,124 300,606 Trading assets-derivative receivables 60,552 56,466 63,387 Loans: Loans retained(a) 114,417 108,368 111,082 Loans held-for-sale and loans at fair value 6,412 4,995 3,812 Total loans 120,829 113,363 114,894 Core loans 120,560 113,006 114,455 Equity 70,000 70,000 64,000 Headcount (b) 54,480 51,181 48,748 (a) Loans retained includes credit portfolio loans, loans held by consolidated Firm-administered multi-seller conduits, trade finance loans, other held-for-investment loans and overdrafts. (b) During the third quarter of 2018 approximately 1,200 employees transferred from CCB to CIB as part of the reorganization of the Commercial Card business. Selected metrics As of or for the year ended December 31, (in millions, except ratios) 2018 2017 2016 Credit data and quality statistics Net charge-offs/ (recoveries) $ 93 $ 71 $ 168 Nonperforming assets: Nonaccrual loans: Nonaccrual loans retained(a) 443 812 467 Nonaccrual loans heldfor-sale and loans at fair value 220 — 109 Total nonaccrual loans 663 812 576 Derivative receivables 60 130 223 Assets acquired in loan satisfactions 57 85 79 Total nonperforming assets 780 1,027 878 Allowance for credit losses: Allowance for loan losses 1,199 1,379 1,420 Allowance for lendingrelated commitments 754 727 801 Total allowance for credit losses 1,953 2,106 2,221 Net charge-off/(recovery) rate(b) 0.08% 0.07% 0.15% Allowance for loan losses to period-end loans retained 0.93 1.27 1.27 Allowance for loan losses to period-end loans retained, excluding trade finance and conduits(c) 1.24 1.92 1.86 Allowance for loan losses to nonaccrual loans retained(a) 271 170 304 Nonaccrual loans to total period-end loans 0.47 0.72 0.50 (a) Allowance for loan losses of $174 million, $316 million and $113 million were held against these nonaccrual loans at December 31, 2018, 2017 and 2016, respectively. (b) Loans held-for-sale and loans at fair value were excluded when calculating the net charge-off/(recovery) rate. (c) Management uses allowance for loan losses to period-end loans retained, excluding trade finance and conduits, a non-GAAP financial measure, to provide a more meaningful assessment of CIB’s allowance coverage ratio. Investment banking fees Year ended December 31, (in millions) 2018 2017 2016 Advisory $ 2,509 $ 2,150 $ 2,110 Equity underwriting 1,684 1,468 1,213 Debt underwriting (a) 3,280 3,738 3,225 Total investment banking fees $ 7,473 $ 7,356 $ 6,548 (a) Includes loan syndications. JPMorgan Chase & Co./2018 Form 10-K 69 League table results – wallet share 2018 2017 2016 Year ended December 31, Rank Share Rank Share Rank Share Based on fees(a) Long-term debt(b) Global #1 7.3% #1 7.8% #1 6.8% U.S. 1 11.2 2 11.1 1 11.1 Equity and equity-related Global(c) 1 9.1 2 7.1 1 7.4 U.S. 1 12.3 1 11.6 1 13.4 M&A(d) Global 2 8.9 2 8.4 2 8.3 U.S. 2 9.1 2 9.1 2 9.8 Loan syndications Global 1 9.5 1 9.3 1 9.3 U.S. 1 12.1 1 11.0 2 11.9 Global investment banking fees (e) #1 8.7% #1 8.1% #1 7.9% (a) Source: Dealogic as of January 1, 2019. Reflects the ranking of revenue wallet and market share. (b) Long-term debt rankings include investment-grade, high-yield, supranationals, sovereigns, agencies, covered bonds, asset-backed securities (“ABS”) and mortgagebacked securities (“MBS”); and exclude money market, short-term debt, and U.S. municipal securities. (c) Global equity and equity-related ranking includes rights offerings and Chinese A-Shares. (d) Global M&A reflects the removal of any withdrawn transactions. U.S. M&A revenue wallet represents wallet from client parents based in the U.S. (e) Global investment banking fees exclude money market, short-term debt and shelf deals. Markets revenue The following table summarizes select income statement data for the Markets businesses. Markets includes both Fixed Income Markets and Equity Markets. Markets revenue comprises principal transactions, fees, commissions and other income, as well as net interest income. The Firm assesses its Markets business performance on a total revenue basis, as offsets may occur across revenue line items. For example, securities that generate net interest income may be risk-managed by derivatives that are recorded in principal transactions revenue. For a description of the composition of these income statement line items, refer to Notes 6 and 7. Principal transactions reflects revenue on financial instruments and commodities transactions that arise from client-driven market making activity. Principal transactions revenue includes amounts recognized upon executing new transactions with market participants, as well as “inventoryrelated revenue”, which is revenue recognized from gains and losses on derivatives and other instruments that the Firm has been holding in anticipation of, or in response to, client demand, and changes in the fair value of instruments used by the Firm to actively manage the risk exposure arising from such inventory. Principal transactions revenue recognized upon executing new transactions with market participants is driven by many factors including the level of client activity, the bid-offer spread (which is the difference between the price at which a market participant is willing to sell an instrument to the Firm and the price at which another market participant is willing to buy it from the Firm, and vice versa), market liquidity and volatility. These factors are interrelated and sensitive to the same factors that drive inventory-related revenue, which include general market conditions, such as interest rates, foreign exchange rates, credit spreads, and equity and commodity prices, as well as other macroeconomic conditions. For the periods presented below, the predominant source of principal transactions revenue was the amount recognized upon executing new transactions. 2018 2017 2016 Year ended December 31, (in millions, except where otherwise noted) Fixed Income Markets Equity Markets Total Markets Fixed Income Markets Equity Markets Total Markets Fixed Income Markets Equity Markets Total Markets Principal transactions $ 7,560 $ 5,566 $ 13,126 $ 7,393 $ 3,855 $ 11,248 $ 8,347 $ 3,130 $ 11,477 Lending- and deposit-related fees 197 6 203 191 6 197 220 2 222 Asset management, administration and commissions 410 1,794 2,204 390 1,635 2,025 388 1,551 1,939 All other income 952 22 974 436 (21) 415 1,014 13 1,027 Noninterest revenue 9,119 7,388 16,507 8,410 5,475 13,885 9,969 4,696 14,665 Net interest income(a) 3,587 (500) 3,087 4,402 228 4,630 5,290 1,044 6,334 Total net revenue $ 12,706 $ 6,888 $ 19,594 $ 12,812 $ 5,703 $ 18,515 $ 15,259 $ 5,740 $ 20,999 Loss days(b) 5 4 0 (a) Declines in Markets net interest income in 2018 and 2017 were driven by higher funding costs. (b) Loss days represent the number of days for which Markets posted losses. The loss days determined under this measure differ from the disclosure of daily market risk-related gains and losses for the Firm in the value-at-risk (“VaR”) back-testing discussion on pages 126-128. Management’s discussion and analysis 70 JPMorgan Chase & Co./2018 Form 10-K Selected metrics As of or for the year ended December 31, (in millions, except where otherwise noted) 2018 2017 2016 Assets under custody (“AUC”) by asset class (period-end) (in billions): Fixed Income $ 12,440 $ 13,043 $ 12,166 Equity 8,078 7,863 6,428 Other(a) 2,699 2,563 1,926 Total AUC $ 23,217 $ 23,469 $ 20,520 Client deposits and other third party liabilities (average)(b) $ 434,422 $ 408,911 $ 376,287 (a) Consists of mutual funds, unit investment trusts, currencies, annuities, insurance contracts, options and other contracts. (b) Client deposits and other third party liabilities pertain to the Treasury Services and Securities Services businesses. International metrics Year ended December 31, (in millions, except where otherwise noted) 2018 2017 2016 Total net revenue(a) Europe/Middle East/Africa $ 12,102 $ 11,328 $ 10,786 Asia/Pacific 5,219 4,525 4,915 Latin America/Caribbean 1,394 1,125 1,225 Total international net revenue 18,715 16,978 16,926 North America 17,733 17,679 18,414 Total net revenue $ 36,448 $ 34,657 $ 35,340 Loans retained (period-end)(a) Europe/Middle East/Africa $ 26,524 $ 25,931 $ 26,696 Asia/Pacific 16,778 15,248 14,508 Latin America/Caribbean 5,060 6,546 7,607 Total international loans 48,362 47,725 48,811 North America 81,027 61,040 63,061 Total loans retained $129,389 $108,765 $ 111,872 Client deposits and other thirdparty liabilities (average)(a)(b) Europe/Middle East/Africa $162,846 $154,582 $ 135,979 Asia/Pacific 82,867 76,744 68,110 Latin America/Caribbean 26,668 25,419 22,914 Total international $272,381 $256,745 $ 227,003 North America 162,041 152,166 149,284 Total client deposits and other third-party liabilities $434,422 $408,911 $ 376,287 AUC (period-end)(a) (in billions) North America $ 14,359 $ 13,971 $ 12,290 All other regions 8,858 9,498 8,230 Total AUC $ 23,217 $ 23,469 $ 20,520 (a) Total net revenue is based predominantly on the domicile of the client or location of the trading desk, as applicable. Loans outstanding (excluding loans held-for-sale and loans at fair value), client deposits and other third-party liabilities, and AUC are based predominantly on the domicile of the client. (b) Client deposits and other third party liabilities pertain to the Treasury Services and Securities Services businesses.

Notes to consolidated financial statements 170 JPMorgan Chase & Co./2018 Form 10-K Correlation – Correlation is a measure of the relationship between the movements of two variables (e.g., how the change in one variable influences the change in the other). Correlation is a pricing input for a derivative product where the payoff is driven by one or more underlying risks. Correlation inputs are related to the type of derivative (e.g., interest rate, credit, equity, foreign exchange and commodity) due to the nature of the underlying risks. When parameters are positively correlated, an increase in one parameter will result in an increase in the other parameter. When parameters are negatively correlated, an increase in one parameter will result in a decrease in the other parameter. An increase in correlation can result in an increase or a decrease in a fair value measurement. Given a short correlation position, an increase in correlation, in isolation, would generally result in a decrease in a fair value measurement. The level of correlation used in the valuation of derivatives with multiple underlying risks depends on a number of factors including the nature of those risks. For example, the correlation between two credit risk exposures would be different than that between two interest rate risk exposures. Similarly, the tenor of the transaction may also impact the correlation input, as the relationship between the underlying risks may be different over different time periods. Furthermore, correlation levels are very much dependent on market conditions and could have a relatively wide range of levels within or across asset classes over time, particularly in volatile market conditions. Volatility – Volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Volatility is a pricing input for options, including equity options, commodity options, and interest rate options. Generally, the higher the volatility of the underlying, the riskier the instrument. Given a long position in an option, an increase in volatility, in isolation, would generally result in an increase in a fair value measurement. The level of volatility used in the valuation of a particular option-based derivative depends on a number of factors, including the nature of the risk underlying the option (e.g., the volatility of a particular equity security may be significantly different from that of a particular commodity index), the tenor of the derivative as well as the strike price of the option. EBITDA multiple – EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied by the historic and/or expected earnings before interest, taxes, depreciation and amortization (“EBITDA”) of a company in order to estimate the company’s value. An increase in the EBITDA multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement. Changes in level 3 recurring fair value measurements The following tables include a rollforward of the Consolidated balance sheets amounts (including changes in fair value) for financial instruments classified by the Firm within level 3 of the fair value hierarchy for the years ended December 31, 2018, 2017 and 2016. When a determination is made to classify a financial instrument within level 3, the determination is based on the significance of the unobservable inputs to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology. Also, the Firm riskmanages the observable components of level 3 financial instruments using securities and derivative positions that are classified within level 1 or 2 of the fair value hierarchy; as these level 1 and level 2 risk management instruments are not included below, the gains or losses in the following tables do not reflect the effect of the Firm’s risk management activities related to such level 3 instruments.

Note 3 – Fair value option The fair value option provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments. The Firm has elected to measure certain instruments at fair value for several reasons including to mitigate income statement volatility caused by the differences between the measurement basis of elected instruments (e.g., certain instruments elected were previously accounted for on an accrual basis) and the associated risk management arrangements that are accounted for on a fair value basis, as well as to better reflect those instruments that are managed on a fair value basis. The Firm’s election of fair value includes the following instruments: • Loans purchased or originated as part of securitization warehousing activity, subject to bifurcation accounting, or managed on a fair value basis, including lendingrelated commitments • Certain securities financing agreements, such as those with an embedded derivative and/or a maturity of greater than one year • Owned beneficial interests in securitized financial assets that contain embedded credit derivatives, which would otherwise be required to be separately accounted for as a derivative instrument • Structured notes, which are predominantly financial instruments that contain embedded derivatives, that are issued as part of CIB’s client-driven activities • Certain long-term beneficial interests issued by CIB’s consolidated securitization trusts where the underlying assets are carried at fair value

Note 4 – Credit risk concentrations Concentrations of credit risk arise when a number of clients, counterparties or customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. JPMorgan Chase regularly monitors various segments of its credit portfolios to assess potential credit risk concentrations and to obtain additional collateral when deemed necessary and permitted under the Firm’s agreements. Senior management is significantly involved in the credit approval and review process, and risk levels are adjusted as needed to reflect the Firm’s risk appetite. In the Firm’s consumer portfolio, concentrations are managed primarily by product and by U.S. geographic region, with a key focus on trends and concentrations at the portfolio level, where potential credit risk concentrations can be remedied through changes in underwriting policies and portfolio guidelines. For additional information on the geographic composition of the Firm’s consumer loan portfolios, refer to Note 12. In the wholesale portfolio, credit risk concentrations are evaluated primarily by industry and monitored regularly on both an aggregate portfolio level and on an individual client or counterparty basis. The Firm’s wholesale exposure is managed through loan syndications and participations, loan sales, securitizations, credit derivatives, master netting agreements, collateral and other risk-reduction techniques. For additional information on loans, refer to Note 12. The Firm does not believe that its exposure to any particular loan product or industry segment (e.g., real estate), or its exposure to residential real estate loans with high LTV ratios, results in a significant concentration of credit risk. Terms of loan products and collateral coverage are included in the Firm’s assessment when extending credit and establishing its allowance for loan losses.