JPMorgan Chase (JPM -0.40%), the largest bank in the U.S., has long been known for its fortress balance sheet, which is one of the things Chief Executive Officer Jamie Dimon is most proud of. A fortress balance sheet means that the bank has enough capital and is liquid enough to withstand a severe economic shock and still be able to lend money to individuals, families, and small businesses. Examples of economic shocks are those seen during the Great Recession and at the onset of the coronavirus pandemic.

But over the next few years, JPMorgan Chase is expected to build capital from its current levels. Will the bank still have the fortress balance sheet that has made it famous? Let's take a look.

Higher regulatory capital requirements

Since the Great Recession, banks have by and large been required to hold more capital, as directed by regulators like the Federal Reserve, to ensure that the global banking system is prepared for the worst. 

A good way to look at a bank's regulatory capital levels is through its common-equity tier 1 (CET1) ratio, which is a bank's core capital expressed as a percentage of its risk-weighted assets such as loans. JPMorgan Chase ended the first quarter of 2022 with an 11.9% CET1 ratio, safely above its current requirement of 11.2%.

But management expects this requirement to keep increasing over the next few years. The CET1 ratio is composed of three layers:

  • The bottom 4.5% that every bank must maintain,
  • The stress capital buffer (SCB), which is largely determined by stress testing conducted by the Fed every year, and
  • The global systemically important bank (G-SIB) charge, which only affects the largest banks like JPMorgan Chase.

Management expects both the SCB and G-SIB requirements to go up next year and therefore is targeting a 12.5% to 13% CET1 ratio by the first quarter of 2024.

JPMorgan Chase CET1 requirements.

Data source: JPMorgan Chase.

A half-percent may not seem like a big deal, but given we are talking about tens and hundreds of billions of dollars, a fraction of a percentage can amount to a lot of capital. For instance, at the end of Q1, JPMorgan Chase had $208 billion of CET1 capital and risk-weighted assets of $1.753 trillion, which is where the 11.9% CET1 ratio comes from. To increase the ratio to 12.5% the bank would need about $12 billion more of capital, or would need to lower risk-weighted assets. And remember, capital is replenished by earnings each quarter but also gets diminished by dividends, share repurchases, and loan growth.

The need to build capital may limit potential dividend growth and share repurchases. JPMorgan Chase already said it does not plan to raise its dividend in the current quarter, even though many other banks are. Furthermore, by 2024 the bank expects to have $13 billion to $22 billion of excess capital above its new target CET1 ratio. That's certainly not insignificant, but consider that JPMorgan authorized a $30 billion share repurchase program in 2021. JPMorgan also needs to use that capital to cover the dividend and for new business opportunities.

Does JPMorgan Chase still have a fortress balance sheet?

The bank may need to build equity and may not have as much excess capital for distributions to shareholders, but it absolutely still has a fortress balance sheet. JPMorgan Chase has more than $1.6 trillion in cash reserves, U.S. Treasury securities, and other highly liquid assets.

JPMorgan also passed a stress test this year. The Fed put the largest banks in the U.S. through a nine-quarter hypothetical scenario in which unemployment surpassed 10%, commercial real estate prices fell 40% and stock prices fell 55%. During this time, the Fed calculated that JPMorgan would incur more than $64 billion of loan losses, take a nearly $41 billion loss, and only see its CET1 ratio fall as low as 9.8%, which is still a very healthy level of capital.

So, yes, JPMorgan Chase does still have a fortress balance sheet and is arguably one of the safest banks in the world. But as regulatory capital requirements go up, the bank still may need to build capital and capital distributions may be more modest in the near term than in years past.