09 January 2015

Financial Times: Regulators right to cut biggest banks down to size

That is not to say it is a bad idea. In fact, it may be a very good idea, possibly for JPMorgan’s shareholders, and definitely for society as a whole. It also suggests that the world’s banking regulators are steadily coming around to the idea of dismantling the largest banks with their own tools rather than relying on governments to do the right thing. If so, jolly good luck to them.

Goldman’s analysts did not have the idea of running the numbers on a JPMorgan break-up on their own. They were given a prod by the US Federal Reserve, which last month unveiled its plan for higher capital ratios for the eight US banks that figure among the 29 “global systemically important banks”. They are the financial institutions that regulators could least afford to let fail chaotically in any crisis.

Top of the US list is JPMorgan, which is not only the biggest and most diverse US bank, with $2.4tn in assets and operations in many countries, ranging from credit cards to credit derivatives, but is inconveniently successful across the board. Unlike many rivals, such as Barclays, there has been no reason for it to spin off its investment bank or slim down by other means.

The Fed has now stepped forward and provided one, with a suggestion that if this does not suffice, it may raise the stakes further. Jamie Dimon, JPMorgan’s sometimes emotional chief executive, gave a sweet insight into his psyche in his last letter to shareholders. “It is in our nature to worry more about the downside than to guess at the upside,” he wrote. Well, here is something more for him to fret about.

The Fed’s variation on the capital standards agreed by global banking regulators in Basel is to force the largest, most complex, and potentially most fragile US banks to hold a lot more capital. JPMorgan is $22bn short of the Fed’s fresh target for 2019, which is “a pretty impressive shortfall”, as Stanley Fischer, the Fed’s vice-chairman, noted last month.

The stated reason for the new capital standards is to promote financial stability, which nobody would argue with — not even most bankers. It is abundantly clear that banks had too little capital entering the 2008 crisis, and much of what they declared was too flimsy to be of real help. For banks’ capital ratios, the only way has been up.

But the Fed hints at a second motive, which is to make it so onerous and expensive for large and complex banks to operate that they will decide to break themselves up into smaller — and easier to supervise — operations. Daniel Tarullo, the Fed governor in charge of banking regulation, told a Senate committee in September that its capital proposal “might also create incentives for them to reduce their systemic footprint and risk profile”.

Full article on Financial Times (subscription required)

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