This year’s letter to JP Morgan Chase investors begins cheerfully enough: “Dear fellow shareholders, Your Company earned a record $19 billion in 2011, up 9 percent from the record earnings of $17.4 billion in 2010.” However, it isn’t too long before Jamie Dimon, JPM chairman and chief executive officer, reminds the world about what he thinks of certain aspects of Dodd-Frank and other reforms intended to promote financial stability.
Dimon said complying with these reforms will cost his company billions, but that’s just one of his concerns.
“It has been estimated that there are 14,000 new regulatory requirements that will be implemented over the next few years,” Dimon wrote in his March 30 letter. “These new rules will affect virtually every legal entity, system (we have 8,000 of these), banker and client around the world.”
He estimated that roughly 3,000 JPM employees will be devoted to complying with these regulatory reforms at a cost of nearly $3 billion.
Can you blame Dimon for being miffed? In another time, the problem of financial stability fell squarely within the purview of the nation’s banking houses and the House of Morgan in particular. In 1907, it was John Pierpont Morgan who averted a depression, so the story goes, by galvanizing a coalition of financiers to save the nation’s banking system from collapse. The size and interconnected nature of the financial system makes such ‘saves’ impossible now, yet despite a Great Depression and now a Great Recession, both of which took down numerous respected organizations, JP Morgan remains.
But times have changed. These days, it almost seems that saving the economy is accomplished by stringing together large numbers of regulatory acronyms. One of Dimon’s least favorite may be G-SIB. An entity designated as a G-SIB [global systemically important bank] will face a capital surcharge in addition to the other capital policies adopted by the Basel Committee on Banking Supervision under Basel III. The Federal Reserve signaled support for these additional requirements.
“Once again, very complex regulations are being overlaid on already complex regulations,” Dimon wrote. “Under the new Basel III rules, all banks will be required to have 7 percent Basel III common equity. The new G-SIB requirements mandate for a company our size approximately 2.5 percent more capital, totaling 9.5 percent Tier 1 common equity. This is capital that we simply don’t need.”
Dimon noted that if anything, his company has proven time and again that its capital levels are more than adequate. The Fed recently tested JPM’s capital under the regulator’s Comprehensive Capital Analysis and Review stress-testing regime. The Fed-run test examined how the nation’s 19 largest banks would hold up under a scenario that included a peak unemployment rate of 13 percent, a 50 percent drop in equity prices and a further 21 percent decline in housing prices.
“Recent stress test results conclude that we can increase the dividend, buy back $12 billion of stock and still have capital in the worst quarter of no less than 5 percent,” Dimon said. “We believe that even if the Fed’s severe stress scenario actually happens, our capital ratios will drop only modestly since we will very actively manage our risk exposures, expenses and capital.
“Keep in mind that during the real stress test after the collapse of Lehman Brothers, our capital levels never went down, even after buying $500 billion of assets through the acquisitions of Bear Stearns and WaMu,” he continued.
He also said the G-SIB provisions give no credit to systemic improvements that will flow from Dodd-Frank’s orderly resolution framework, a financial reform he wholeheartedly embraces.
“Regardless of how we feel about the G-SIB surcharge, we, of course, will meet all the requirements –– and currently believe we can do so and still earn adequate returns for our shareholders,” Dimon said. “We just don’t think it is the right way to regulate banks –– or operate a financial system.”