JPMORGAN CHASE & CO

CREDIT PORTFOLIO

Credit risk is the risk associated with the default or change in credit profile of a client, counterparty or customer.

In the following tables, total loans include loans retained (i.e., held-for-investment); loans held-for-sale; and certain loans accounted for at fair value. The following tables do not include loans which the Firm accounts for at fair value and classifies as trading assets; refer to Notes 2 and 3 for further information regarding these loans. Refer to Notes 12, 28, and 5 for additional information on the Firm’s loans, lending-related commitments and derivative receivables, including the Firm’s related accounting policies.

Refer to Note 10 for information regarding the credit risk inherent in the Firm’s investment securities portfolio; and refer to Note 11 for information regarding credit risk inherent in the securities financing portfolio. Refer to Consumer Credit Portfolio onpages 114–119 and Note 12 for further discussions of the consumer credit environment and consumer loans. Refer to Wholesale Credit Portfolio on pages 120–130 and Note 12 for further discussions of the wholesale credit environment and wholesale loans.

On January 1, 2023, the Firm adopted changes to the TDR accounting guidance, which eliminated the accounting and disclosure requirements for TDRs including the requirement to assess whether a modification is reasonably expected or involves a concession. The new guidance requires disclosure of loan modifications to borrowers experiencing financial difficulty consisting of principal forgiveness, interest rate reduction, other-than-insignificant payment delay, term extension or a combination of these modifications. The Firm has defined these types of modifications as financial difficulty modifications ("FDMs"). As a result of the elimination of the requirement to assess whether a modification is reasonably expected or involves a concession, the population of loans considered FDMs differs from the population previously considered TDRs. Refer to Note 1 and Note 12 for further information.

(a) Receivables from customers reflect held-for-investment margin loans to brokerage clients in CIB, CCB and AWM; these are reported within accrued interest and accounts receivable on the Consolidated balance sheets.

(b) Represents the net notional amount of protection purchased and sold through credit derivatives and credit-related notes used to manage credit exposures.

(c) Includes credit exposure associated with First Republic consisting of $102.2 billion in the Consumer credit portfolio and $90.6 billion in the Wholesale credit portfolio.

(d) At December 31, 2023 and 2022, nonperforming assets excluded mortgage loans 90 or more days past due and insured by U.S. government agencies of $182 million and $302 million, respectively. These amounts have been excluded based upon the government guarantee. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance.

The following table provides information on Firmwide nonaccrual loans to total loans.

The following table provides information about the Firm’s net charge-offs and recoveries.

CONSUMER CREDIT PORTFOLIO

The Firm’s retained consumer portfolio consists primarily of loans and lending-related commitments for residential real estate, credit card, scored auto and business banking, including those associated with First Republic, primarily in residential real estate. The consumer credit portfolio also includes loans at fair value, predominantly in residential real estate. The Firm’s focus is on serving primarily the prime segment of the consumer credit market. Originated mortgage loans are retained in the residential real estate portfolio, securitized or sold to U.S. government agencies and U.S. government-sponsored enterprises; other types of consumer loans are typically retained on the balance sheet. Refer to Note 12 for further information on the consumer loan portfolio. Refer to Note 28 for further information on lending-related commitments.

The following tables present consumer credit-related information with respect to the scored credit portfolio held in CCB, AWM, CIB and Corporate.

(a)Includes scored mortgage and home equity loans held in CCB and AWM.

(b)At December 31, 2023 and 2022, excluded operating lease assets of $10.4 billion and $12.0 billion, respectively. These operating lease assets are included in other assets on the Firm’s Consolidated balance sheets. Refer to Note 18 for further information.

(c)Includes scored auto and business banking loans, and overdrafts.

(d)Includes scored mortgage loans held in CCB and CIB, and other consumer unsecured loans in CIB.

(e)Credit card, home equity and certain business banking lending-related commitments represent the total available lines of credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit would be used at the same time. For credit card commitments, and if certain conditions are met, home equity commitments and certain business banking commitments, the Firm can reduce or cancel these lines of credit by providing the borrower notice or, in some cases as permitted by law, without notice. Refer to Note 28 for further information.

(f)Includes billed interest and fees.

(g)Also includes commercial card lending-related commitments primarily in CB and CIB.

(h)Represents the notional amount of protection obtained through the issuance of credit-related notes that reference certain pools of residential real estate and auto loans in the retained consumer portfolio.

(i)At December 31, 2023, included credit exposure of $102.2 billion associated with First Republic, consisting of $99.6 billion in residential real estate and $2.6 billion in auto and other.

(j)At December 31, 2023 and 2022, nonaccrual loans excluded mortgage loans 90 or more days past due and insured by U.S. government agencies of $182 million and $302 million, respectively. These amounts have been excluded from nonaccrual loans based upon the government guarantee. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status, as permitted by regulatory guidance.

(k)Generally excludes loans under payment deferral programs offered in response to the COVID-19 pandemic.

(l)At December 31, 2023 and 2022, nonaccrual loans excluded $15 million and $101 million, respectively, of PPP loans 90 or more days past due and guaranteed by the SBA.

(m)Average consumer loans held-for-sale and loans at fair value were $12.9 billion and $17.4 billion for the years ended December 31, 2023 and 2022, respectively. These amounts were excluded when calculating net charge-off/(recovery) rates.

Maturities and sensitivity to changes in interest rates

The table below sets forth loan maturities by scheduled repayments, by class of loan and the distribution between fixed and floating interest rates based on the stated terms of the loan agreements. The Firm estimated the principal repayment amounts for both the residential real estate and auto and other loan classes by calculating the weighted-average loan balance and interest rates for loan pools based on remaining loan term. Refer to Note 12 for further information on loan classes.

(a)Included $3.9 billion, $4.6 billion, $27.9 billion, and $56.2 billion of loans within 1 year, 1-5 years, 5-15 years, and after 15 years, respectively, associated with First Republic.

(b)Included $3.0 billion, $8.9 billion, and $15.1 billion in 1-5 years, 5-15 years, and after 15 years, respectively, associated with First Republic.

(c)Includes loans that have an initial fixed interest rate that resets to a variable rate as the variable rate will be the prevailing rate over the life of the loan.

(d)Included $1.6 billion, $19.1 billion, and $41.0 billion in 1-5 years, 5-15 years, and after 15 years, respectively, associated with First Republic.

(e)Includes loans held-for-sale and loans at fair value.

(f)Includes overdrafts.

Consumer, excluding credit card

Portfolio analysis

Loans increased from December 31, 2022 driven by residential real estate loans associated with First Republic and higher auto loans.

The following discussions provide information concerning individual loan products. Refer to Note 12 for further information about this portfolio, including information about delinquencies, loan modifications and other credit quality indicators.

Residential real estate: The residential real estate portfolio, including loans held-for-sale and loans at fair value, predominantly consists of prime mortgage loans and home equity lines of credit.

Retained loans increased compared to December 31, 2022 driven by residential real estate loans associated with First Republic. Retained nonaccrual loans decreased compared to December 31, 2022 predominantly driven by loan sales, partially offset by the net impact of paydowns and additions, including those associated with First Republic. Net recoveries were lower for the year ended December 31, 2023 compared to the prior year driven by lower prepayments due to higher interest rates.

Loans at fair value increased from December 31, 2022, driven by an increase in Home Lending as originations outpaced warehouse loan sales, and in CIB as purchases outpaced sales and paydowns.

At December 31, 2023 and 2022, the carrying values of interest-only residential mortgage loans were $90.6 billion and $36.3 billion, respectively. The increase was driven by First Republic. These loans have an interest-only payment period generally followed by an adjustable-rate or fixed-rate fully amortizing payment period to maturity and are typically originated as higher-balance loans to higher-income borrowers. The credit performance of this portfolio is comparable with the performance of the broader prime mortgage portfolio.

The carrying value of home equity lines of credit outstanding was $16.1 billion at December 31, 2023, which included $2.6 billion associated with First Republic. The carrying value of home equity lines of credit outstanding included $4.2 billion of HELOCs that have recast from interest-only to fully amortizing payments or have been modified and $4.3 billion of interest-only balloon HELOCs, which primarily mature after 2030. The Firm manages the risk of HELOCs during their revolving period by closing or reducing the undrawn line to the extent permitted by law when borrowers are exhibiting a material deterioration in their credit risk profile.

The following table provides a summary of the Firm’s

residential mortgage portfolio insured and/or guaranteed

by U.S. government agencies, predominantly loans held-for-sale and loans at fair value. The Firm monitors its exposure to certain potential unrecoverable claim payments related to government-insured loans and considers this exposure in estimating the allowance for loan losses.

Geographic composition and current estimated loan-to-value ratio of residential real estate loans

At December 31, 2023, $228.4 billion, or 70% of the total retained residential real estate loan portfolio, was concentrated in California, New York, Florida, Texas and Massachusetts, compared with $147.8 billion, or 62% at December 31, 2022.

Average current estimated loan-to-value (“LTV”) ratios have improved, reflecting an increase in home prices.

Refer to Note 12 for information on the geographic composition and current estimated LTVs of the Firm’s residential real estate loans.

Modified residential real estate loans

For theyear ended December 31, 2023, residential real estate FDMs were $136 million. In addition to FDMs, the Firm also had $69 million of loans subject to trial modification where the terms of the loans have not been permanently modified, as well as $9 million of loans subject to discharge under Chapter 7 bankruptcy proceedings ("Chapter 7 loans"). The changes to the TDR accounting guidance eliminated the TDR reasonably expected and concession assessment criteria. Accordingly, trial modifications and Chapter 7 loans were considered TDRs, but not FDMs. Refer to Note 1 and Note 12 for further information.

For theyear ended December 31, 2022, residential real estate TDRs were $362 million. Refer to Note 12 for further information on TDRs in prior periods.

Auto and other: The auto and other loan portfolio, including loans at fair value, generally consists of prime-quality scored auto and business banking loans, other consumer unsecured loans, and overdrafts. The portfolio increased when compared to December 31, 2022 due to originations of scored auto loans and an increase in other consumer unsecured fair value option loans in CIB associated with First Republic, largely offset by paydowns. Net charge-offs for the year ended December 31, 2023 increased compared to the prior year due to higher charge-offs of scored auto loans driven by the decline in used vehicle valuations. The scored auto net charge-off rates were 0.56% and 0.24% for the years ended December 31, 2023 and 2022, respectively.

Nonperforming assets

The following table presents information as of December 31, 2023 and 2022, about consumer, excluding credit card, nonperforming assets.

(a)At December 31, 2023 and 2022, nonperforming assets excluded mortgage loans 90 or more days past due and insured by U.S. government agencies of $182 million and $302 million, respectively. These amounts have been excluded based upon the government guarantee.

(b)Generally excludes loans under payment deferral programs offered in response to the COVID-19 pandemic.

(c)At December 31, 2023 and 2022, nonaccrual loans excluded $15 million and $101 million, respectively, of PPP loans 90 or more days past due and guaranteed by the SBA.

The following table presents changes in consumer, excluding credit card, nonaccrual loans for the years ended December 31, 2023 and 2022.

(a)Other reductions include loan sales.

Refer to Note 12 for further information about the consumer credit portfolio, including information about delinquencies, other credit quality indicators, loan modifications and loans that were in the process of active or suspended foreclosure.

Credit card

Total credit card loans increased from December 31, 2022 reflecting growth from new accounts and revolving balances which continued to normalize to pre-pandemic levels. The December 31, 2023 30+ and 90+ day delinquency rates of 2.14% and 1.05%, respectively, increased compared to the December 31, 2022 30+ and 90+ day delinquency rates of 1.45% and 0.68%, respectively. Net charge-offs increased for the year ended December 31, 2023 compared to the prior year as delinquencies have normalized.

Consistent with the Firm’s policy, all credit card loans typically remain on accrual status until charged off. However, the Firm’s allowance for loan losses includes the estimated uncollectible portion of accrued and billed interest and fee income.

Geographic and FICO composition of credit card loans

At December 31, 2023, $98.1 billion, or 46% of the total retained credit card loan portfolio, was concentrated in California, Texas, New York, Florida and Illinois, compared with $85.4 billion, or 46%, at December 31, 2022.

Modifications of credit card loans

For the year ended December 31, 2023, credit card FDMs were $648 million. FDMs increased for the year ended December 31, 2023 compared to credit card TDRs in the prior year, as delinquencies have normalized. In addition to FDMs, the Firm also had $27 million of loans subject to trial modification where the terms of the loans have not been permanently modified for the year ended December 31, 2023. The changes to the TDR accounting guidance eliminated the TDR reasonably expected and concession assessment criteria. Accordingly, trial modifications were considered TDRs, but not FDMs.

For theyear ended December 31, 2022, credit card TDRs were $418 million.

Refer to Note 1 and Note 12 for further information about this portfolio, including information about delinquencies, geographic and FICO composition, and modifications.

WHOLESALE CREDIT PORTFOLIO

In its wholesale businesses, the Firm is exposed to credit risk primarily through its underwriting, lending, market-making, and hedging activities with and for clients and counterparties, as well as through various operating services (such as cash management and clearing activities), securities financing activities and cash placed with banks. A portion of the loans originated or acquired by the Firm’s wholesale businesses is generally retained on the balance sheet. The Firm distributes a significant percentage of the loans that it originates into the market as part of its syndicated loan business and to manage portfolio concentrations and credit risk. The wholesale portfolio is actively managed, in part by conducting ongoing, in-depth reviews of client credit quality and transaction structure, inclusive of collateral where applicable, and of industry, product and client concentrations. Refer to the industry discussion on pages 122–125 for further information.

The Firm’s wholesale credit portfolio includes exposure held in CIB, CB, AWM, and Corporate, and risk-rated exposure held in CCB, for which the wholesale methodology is applied when determining the allowance for loan losses. The Firm continues to convert certain operations, and to integrate clients, products and services, associated with First Republic. Accordingly, reporting classifications and internal risk rating profiles in the wholesale portfolio may change in future periods. Refer to Business Developments on page 53 for additional information.

As of December 31, 2023, retained loans increased $68.8 billion predominantly driven by the impact of First Republic. Lending-related commitments increased $64.8 billion, driven by the impact of First Republic, and net portfolio activity in CIB and CB.

As of December 31, 2023, nonperforming exposure increased $476 million predominantly driven by nonperforming retained loans in Real Estate and Healthcare, reflecting downgrades, and Individuals largely driven by the impact of First Republic, partially offset by a single name upgrade in Civic Organizations.

For the year ended December 31, 2023, wholesale net charge-offs increased $698 million, predominantly driven by the restructuring of a loan, increases in Real Estate (concentrated in Office) and Consumer & Retail.

(a)Receivables from customers reflect held-for-investment margin loans to brokerage clients in CIB, CCB and AWM; these are reported within accrued interest and accounts receivable on the Consolidated balance sheets.

(b)Represents the net notional amount of protection purchased and sold through credit derivatives and credit-related notes used to manage both performing and nonperforming wholesale credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. Refer to Credit derivatives on page 130 and Note 5 for additional information.

(c)Included credit exposure of $90.6 billion associated with First Republic.

Wholesale credit exposure – maturity and ratings profile

The following tables present the maturity and internal risk ratings profiles of the wholesale credit portfolio as of December 31, 2023 and 2022. The Firm generally considers internal ratings with qualitative characteristics equivalent to BBB-/Baa3 or higher as investment grade, and takes into consideration collateral and structural support when determining the internal risk rating for each credit facility. Refer to Note 12 for further information on internal risk ratings.

(a)Loans held-for-sale are primarily related to syndicated loans and loans transferred from the retained portfolio.

(b)These derivatives do not qualify for hedge accounting under U.S. GAAP.

(c)The notional amounts are presented on a net basis by underlying reference entity and the ratings profile shown is based on the ratings of the reference entity on which protection has been purchased. Predominantly all of the credit derivatives entered into by the Firm where it has purchased protection used in credit portfolio management activities are executed with investment-grade counterparties. In addition, the Firm obtains credit protection against certain loans in the retained loan portfolio through the issuance of credit-related notes.

(d)The maturity profile of retained loans, lending-related commitments and derivative receivables is generally based on remaining contractual maturity. Derivative contracts that are in a receivable position at December 31, 2023, may become payable prior to maturity based on their cash flow profile or changes in market conditions.

Wholesale credit exposure – industry exposures

The Firm focuses on the management and diversification of its industry exposures, and pays particular attention to industries with actual or potential credit concerns. Exposures that are deemed to be criticized align with the U.S. banking regulators’ definition of criticized exposures, which consist of the special mention, substandard and doubtful categories. Total criticized exposure, excluding loans held-for-sale and loans at fair value, was $41.4 billion at December 31, 2023 and $31.3 billion at December 31, 2022, representing approximately 3.3% and 2.7% of total wholesale credit exposure, respectively; of the $41.4 billion, $38.3 billion was performing. The increase in criticized exposure was predominantly driven by Real Estate, Technology, Media & Telecommunications (predominantly Technology) and Healthcare, reflecting downgrades.

The table below summarizes by industry the Firm’s exposures as of December 31, 2023 and 2022. The industry of risk category is generally based on the client or counterparty’s primary business activity. Refer to Note 4 for additional information on industry concentrations.

(a)The industry rankings presented in the table as of December 31, 2022, are based on the industry rankings of the corresponding exposures at December 31, 2023, not actual rankings of such exposures at December 31, 2022.

(b)Individuals and Individual Entities predominantly consists of Global Private Bank clients within AWM and J.P. Morgan Wealth Management within CCB, and includes exposure to personal investment companies and personal and testamentary trusts.

(c)In addition to the credit risk exposure to states and municipal governments (both U.S. and non-U.S.) at December 31, 2023 and 2022, noted above, the Firm held: $5.9 billion and $6.6 billion, respectively, of trading assets; $21.4 billion and $6.8 billion, respectively, of AFS securities; and $9.9 billion and $19.7 billion, respectively, of HTM securities, issued by U.S. state and municipal governments. Refer to Note 2 and Note 10 for further information.

(d)All other includes: SPEs and Private education and civic organizations, representing approximately 94% and 6%, respectively, at December 31, 2023 and 95% and 5%, respectively, at December 31, 2022.

(e)Excludes cash placed with banks of $614.1 billion and $556.6 billion, at December 31, 2023 and 2022, respectively, which is predominantly placed with various central banks, primarily Federal Reserve Banks.

(f)Credit exposure is net of risk participations and excludes the benefit of credit derivatives and credit-related notes used in credit portfolio management activities held against derivative receivables or loans and liquid securities and other cash collateral held against derivative receivables.

(g)Credit exposure includes held-for-sale and fair value option elected lending-related commitments.

(h)Included credit exposure of $90.6 billion associated with First Republic predominantly in Real Estate, Asset Managers, and Individuals and Individual Entities.

(i)Represents the net notional amounts of protection purchased and sold through credit derivatives and credit-related notes used to manage the credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. The All other category includes purchased credit protection on certain credit indices.

Presented below is additional detail on certain of the Firm’s industry exposures.

Real Estate

Real Estate exposure was $208.3 billion as of December 31, 2023. Criticized exposure increased by $5.2 billion from $4.0 billion at December 31, 2022 to $9.2 billion at December 31, 2023, predominantly driven by client-specific downgrades, partially offset by client-specific upgrades.

(a)Multifamily exposure is largely in California.

(b)Other Income Producing Properties consists of clients with diversified property types or other property types outside of categories listed in the table above.

(c)Real Estate exposure is approximately 82% secured; unsecured exposure is predominantly investment-grade largely to Real Estate Investment Trusts (“REITs”) and Real Estate Operating Companies (“REOCs”) whose underlying assets are generally diversified.

(d)Included $33.4 billion of credit exposure associated with First Republic, largely in Multifamily.

(e)Represents drawn exposure as a percentage of credit exposure.

Consumer & Retail

Consumer & Retail exposure was $127.1 billion as of December 31, 2023. Criticized exposure increased by $409 million from $7.9 billion at December 31, 2022 to $8.3 billion at December 31, 2023, driven by client-specific downgrades predominantly offset by client-specific upgrades and net portfolio activity.

(a)Retail consists of Home Improvement & Specialty Retailers, Restaurants, Supermarkets, Discount & Drug Stores, Specialty Apparel and Department Stores.

(b)Leisure consists of Gaming, Arts & Culture, Travel Services and Sports & Recreation. As of December 31, 2023, approximately 90% of the noninvestment-grade Leisure portfolio is secured.

(c)Consumer & Retail exposure is approximately 59% secured; unsecured exposure is approximately 79% investment-grade.

(d)Represents drawn exposure as a percent of credit exposure.

Oil & Gas

Oil & Gas exposure was $34.5 billion as of December 31, 2023 of which $123 million was considered criticized.

(a)Other Oil & Gas includes Integrated Oil & Gas companies, Midstream/Oil Pipeline companies and refineries.

(b)Oil & Gas exposure is approximately 35% secured, approximately half of which is reserve-based lending to the Exploration & Production sub-sector; unsecured exposure is approximately 61% investment-grade.

(c)Represents drawn exposure as a percent of credit exposure.

Loans

In its wholesale businesses, the Firm provides loans to a variety of clients, ranging from large corporate and institutional clients to high-net-worth individuals. Refer to Note 12 for a further discussion on loans, including information about delinquencies, loan modifications and other credit quality indicators.

The following table presents the change in the nonaccrual loan portfolio for the years ended December 31, 2023 and 2022. Since December 31, 2022, nonaccrual loan exposure increased by$319 million driven by retained loansin Real Estate and Healthcare, reflecting downgrades, and Individuals largely driven by the impact of First Republic, partially offset by a single name upgrade in Civic Organizations.

The following table presents net charge-offs/recoveries, which are defined as gross charge-offs less recoveries, for the years ended December 31, 2023 and 2022. The amounts in the table below do not include gains or losses from sales of nonaccrual loans recognized in noninterest revenue.

Modified wholesale loans

The amortized cost of wholesale FDMs was $2.1 billion for theyear ended December 31, 2023. Refer to Note 1 and Note 12 for further information.

Wholesale TDRs were $801 million for theyear ended December 31, 2022.

As a result of the elimination of the requirement to assess whether a modification is reasonably expected or involves a concession, the population of loans considered FDMs is greater than the population previously considered TDRs. Refer to Note 12 for further information on TDRs in prior periods.

Maturities and sensitivity to changes in interest rates

The table below sets forth wholesale loan maturities and the distribution between fixed and floating interest rates based on the stated terms of the loan agreements by loan class. Refer to Note 12 for further information on loan classes.

(a)Included $6.6 billion, $16.9 billion, and $9.7 billion of loans in 1 year or less, after 1 year through 5 years, and after 5 years though 15, respectively, associated with First Republic.

(b)Included $9.8 billion, and $4.1 billion of loans in 1 year or less, and after 1 year through 5 years, respectively, associated with First Republic.

(c)Included $9.7 billion, and $5.7 billion in after 1 year through 5 years, and after 5 years though 15, respectively, associated with First Republic.

(d)Includes loans that have an initial fixed interest rate that resets to a variable rate as the variable rate will be the prevailing rate over the life of the loan.

(e)Included $7.1 billion, and $4.0 billion in after 1 year through 5 years, and after 5 years though 15, respectively, associated with First Republic.

(f)Included $3.0 billion in after 1 year through 5 years associated with First Republic.

(g)Includes loans held-for-sale, demand loans and overdrafts.

The following table presents net charge-offs/recoveries, average retained loans and net charge-off/recovery rate by loan class for the year ended December 31, 2023 and 2022.

Lending-related commitments

The Firm uses lending-related financial instruments, such as commitments (including revolving credit facilities) and guarantees, to address the financing needs of its clients. The contractual amounts of these financial instruments represent the maximum possible credit risk should the clients draw down on these commitments or when the Firm fulfills its obligations under these guarantees, and the clients subsequently fail to perform according to the terms of these contracts. Most of these commitments and guarantees have historically been refinanced, extended, cancelled, or expired without being drawn upon or a default occurring. As a result, the Firm does not believe that the total contractual amount of these wholesale lending-related commitments is representative of the Firm’s expected future credit exposure or funding requirements. Refer to Note 28 for further information on wholesale lending-related commitments.

Receivables from customers

Receivables from customers reflect held-for-investment margin loans to brokerage clients in CIB, CCB and AWM that are collateralized by assets maintained in the clients’ brokerage accounts (including cash on deposit, and primarily liquid and readily marketable debt or equity securities). To manage its credit risk, the Firm establishes margin requirements and monitors the required margin levels on an ongoing basis, and requires clients to deposit additional cash or other collateral, or to reduce positions, when appropriate. Credit risk arising from lending activities subject to collateral maintenance requirements is generally mitigated by factors such as the short-term nature of the activity, the fair value of collateral held and the Firm’s right to call for, and the borrower’s obligation to provide, additional margin when the fair value of the collateral declines. Because of these mitigating factors, these receivables generally do not require an allowance for credit losses. However, if in management’s judgment, an allowance for credit losses is required, the Firm estimates expected credit losses based on the value of the collateral and probability of borrower default. These receivables are reported within accrued interest and accounts receivable on the Firm’s Consolidated balance sheets.

Refer to Note 13 for further information on the Firm’s accounting policies for the allowance for credit losses.

Derivative contracts

Derivatives enable clients and counterparties to manage risk, including credit risk and risks arising from fluctuations in interest rates, foreign exchange and equities and commodities prices. The Firm makes markets in derivatives in order to meet these needs and uses derivatives to manage certain risks associated with net open risk positions from its market-making activities, including the counterparty credit risk arising from derivative receivables. The Firm also uses derivative instruments to manage its own credit risk and other market risk exposure. The nature of the counterparty and the settlement mechanism of the derivative affect the credit risk to which the Firm is exposed. For OTC derivatives, the Firm is exposed to the credit risk of the derivative counterparty. For exchange-traded derivatives (“ETD”), such as futures and options, and cleared over-the-counter (“OTC-cleared”) derivatives, the Firm can also be exposed to the

credit risk of the relevant CCP. Where possible, the Firm seeks to mitigate its credit risk exposures arising from derivative contracts through the use of legally enforceable master netting arrangements and collateral agreements. The percentage of the Firm’s OTC derivative transactions subject to collateral agreements — excluding foreign exchange spot trades, which are not typically covered by collateral agreements due to their short maturity and centrally cleared trades that are settled daily — was approximately 87% at both December 31, 2023 and 2022. Refer to Note 5 for additional information on the Firm’s use of collateral agreements and further discussion of derivative contracts, counterparties and settlement types.

The fair value of derivative receivables reported on the Consolidated balance sheets was $54.9 billion and $70.9 billion at December 31, 2023 and 2022, respectively. The decrease was primarily as a result of market movements. Derivative receivables represent the fair value of the derivative contracts after giving effect to legally enforceable master netting agreements and the related cash collateral held by the Firm.

In addition, the Firm holds liquid securities and other cash collateral that may be used as security when the fair value of the client’s exposure is in the Firm’s favor. For these purposes, the definition of liquid securities is consistent with the definition of high quality liquid assets as defined in the LCR rule.

In management’s view, the appropriate measure of current credit risk should also take into consideration other collateral, which generally represents securities that do not qualify as high quality liquid assets under the LCR rule. The benefits of these additional collateral amounts for each counterparty are subject to a legally enforceable master netting agreement and limited to the net amount of the derivative receivables for each counterparty.

The Firm also holds additional collateral (primarily cash, G7 government securities, other liquid government agency and guaranteed securities, and corporate debt and equity securities) delivered by clients at the initiation of transactions, as well as collateral related to contracts that have a non-daily call frequency and collateral that the Firm has agreed to return but has not yet settled as of the reporting date. Although this collateral does not reduce the receivables balances and is not included in the tables below, it is available as security against potential exposure that could arise should the fair value of the client’s derivative contracts move in the Firm’s favor. Refer to Note 5 for additional information on the Firm’s use of collateral agreements for derivative transactions.

The following tables summarize the net derivative receivables and the internal ratings profile for the periods presented.

While useful as a current view of credit exposure, the net fair value of the derivative receivables does not capture the potential future variability of that credit exposure. To capture this variability, the Firm calculates, on a client-by-client basis, three measures of potential derivatives-related credit loss: Peak, Derivative Risk Equivalent (“DRE”), and Average exposure (“AVG”). These measures all incorporate netting and collateral benefits, where applicable.

Peak represents a conservative measure of potential derivative exposure, including the benefit of collateral, to a counterparty calculated in a manner that is broadly equivalent to a 97.5% confidence level over the life of the transaction. Peak is the primary measure used by the Firm for setting credit limits for derivative contracts, senior management reporting and derivatives exposure management.

DRE exposure is a measure that expresses the risk of derivative exposure, including the benefit of collateral, on a basis intended to be equivalent to the risk of loan exposures. DRE is a less extreme measure of potential credit loss than Peak and is used as an input for aggregating derivative credit risk exposures with loans and other credit risk.

Finally, AVG is a measure of the expected fair value of the Firm’s derivative exposures, including the benefit of collateral, at future time periods. AVG over the total life of the derivative contract is used as the primary metric for pricing purposes and is used to calculate credit risk capital and CVA, as further described below.

The fair value of the Firm’s derivative receivables incorporates CVA to reflect the credit quality of counterparties. CVA is based on the Firm’s AVG to a counterparty and the counterparty’s credit spread in the credit derivatives market. The Firm believes that active risk management is essential to controlling the dynamic credit risk in the derivatives portfolio. In addition, the Firm’s risk management process for derivatives exposures takes into consideration the potential impact of wrong-way risk, which

is broadly defined as the risk that exposure to a counterparty is positively correlated with the impact of a default by the same counterparty, which could cause exposure to increase at the same time as the counterparty’s capacity to meet its obligations is decreasing. Many factors may influence the nature and magnitude of these correlations over time. To the extent that these correlations are identified, the Firm may adjust the CVA associated with a particular counterparty’s AVG. The Firm risk manages exposure to changes in CVA by entering into credit derivative contracts, as well as interest rate, foreign exchange, equity and commodity derivative contracts.

The below graph shows exposure profiles to the Firm’s current derivatives portfolio over the next 10 years as calculated by the Peak, DRE and AVG metrics. The three measures generally show that exposure will decline after the first year, if no new trades are added to the portfolio.

Exposure profile of derivatives measures

December 31, 2023

(in billions)

Credit derivatives

The Firm uses credit derivatives for two primary purposes: first, in its capacity as a market-maker, and second, as an end-user to manage the Firm’s own credit risk associated with various exposures.

Credit portfolio management activities

Included in the Firm’s end-user activities are credit derivatives used to mitigate the credit risk associated with traditional lending activities (loans and lending-related commitments) and derivatives counterparty exposure in the Firm’s wholesale businesses (collectively, “credit portfolio management activities”). Information on credit portfolio management activities is provided in the table below.

The Firm also uses credit derivatives as an end-user to manage other exposures, including credit risk arising from certain securities held in the Firm’s market-making businesses. These credit derivatives are not included in credit portfolio management activities.

(a)Amounts are presented net, considering the Firm’s net protection purchased or sold with respect to each underlying reference entity or index.

The credit derivatives used in credit portfolio management activities do not qualify for hedge accounting under U.S. GAAP; these derivatives are reported at fair value, with gains and losses recognized in principal transactions revenue. In contrast, the loans and lending-related commitments being risk-managed are accounted for on an accrual basis. This asymmetry in accounting treatment, between loans and lending-related commitments and the credit derivatives used in credit portfolio management activities, causes earnings volatility that is not representative, in the Firm’s view, of the true changes in value of the Firm’s overall credit exposure.

The effectiveness of credit default swaps (“CDS”) as a hedge against the Firm’s exposures may vary depending on a number of factors, including the named reference entity (i.e., the Firm may experience losses on specific exposures that are different than the named reference entities in the purchased CDS); the contractual terms of the CDS (which may have a defined credit event that does not align with an actual loss realized by the Firm); and the maturity of the Firm’s CDS protection (which in some cases may be shorter than the Firm’s exposures). However, the Firm generally seeks to purchase credit protection with a maturity date that is the same or similar to the maturity date of the exposure for which the protection was purchased, and remaining differences in maturity are actively monitored and managed by the Firm. Refer to Credit derivatives in Note 5 for further information on credit derivatives and derivatives used in credit portfolio management activities.