Jamie Dimon’s bank buffer bellyache

Jamie Dimon’s at it again. In a written statement to the US House Committee on Financial Services the JPMorgan man railed against what he described as the “continued upward trajectory of regulatory capital requirements” covering his and other big banks.

Higher capital requirements do not reflect “actual risk” in the system, Dimon wrote. If anything they exacerbate risk by eroding “banks’ ability to meet customer needs” . . . 

For example, regulatory capital minimum requirements already have JPMorgan Chase setting aside more than $200 billion in capital, which is in addition to loan loss reserves. In the coming months JPMorgan’s amount of required capital will increase not due to increased risk, but because long- needed adjustments have not yet been made to risk-agnostic size-based factors in parts of the capital framework, like the GSIB surcharge. This is bad for America, as it handicaps regulated banks at precisely the wrong time, causing them to be capital constrained and reduce growth in areas like lending, as the country enters difficult economic conditions. It is bad for consumers, as it forces banks to do illogical things like reducing mortgage exposure in order to drive down assets. Strong and resilient banks that can support the American economy through a crisis are key to American growth and competitiveness. I urge our nation’s leaders to be thoughtful about the effect of arbitrary increases in capital requirements and its cumulative impact on lending, market liquidity and other economic activity

Dimon has been banging this drum incessantly ever since governments moved to raise banks’ capital requirements after the great financial crisis.

“People ask me about Dodd Frank and all that,” Dimon told Bloomberg in 2017. “I’m not for wholesale throwing it all out, but no one in their rational mind could say that everything that was done and how it was done, was done right”.

Yet Jeremy Kress, assistant professor of business law at the University of Michigan’s Ross School, dismissed Dimon’s suggestion on Tuesday that JPMorgan has $200bn “sitting in a locked box somewhere” that it could otherwise spend.

“Capital requirements are about how the bank funds its activities, whether through equity or debt. It’s not about having a pile of cash in the vault that the bank isn’t allowed to use for lending,” he told Alphaville:

Dimon can make the decision today for JPMorgan to lend more than it already is, and he can borrow money to do that. But he’d have to fund that activity with a certain amount of equity. What he’s implicitly saying here is ‘I am not willing to do that — to use equity to lend to consumers and businesses because I think it will cost my bank too much. He doesn’t want to admit that he has agency in this decision.

Although they make financial crises less likely, capital requirements do weigh on banks’ ability to lend. The European Systemic Risk Board wrote in 2017 that a one percentage point increase in capital requirements reduces lending by 10 per cent, for example.

The same paper also found that changes in capital requirements impact corporate investment policy. “Faced with a reduction in their ability to borrow, firms shrink their assets, and partly but not fully compensate for this by reducing their lending to suppliers”.

Bank capital requirements are determined by the results of stress tests (which are “inconsistent”, untransparent, volatile, “basically capricious,” and arbitrary, according to Dimon), with each bank’s requirement made up of three parts:

• a minimum [common equity tier 1] capital ratio requirement of 4.5 per cent, which is the same for each bank

• the stress capital buffer (SCB) requirement, which is determined from the supervisory stress test results and is at least 2.5 per cent

• if applicable, a capital surcharge for global systemically important banks (G-SIBs), which is at least 1 per cent.

Adding all that up for JPMorgan comes to 12 per cent — less than Credit Suisse Holdings USA (13.5 per cent), Goldman Sachs (13.3 per cent), DWS USA Corporation (13.2 per cent) and Morgan Stanley (13.3 per cent), according to the Fed.

That might sound high compared with the good old days, when the total risk-based capital minimum requirement was around 8 per cent. However, a 2017 paper by Simon Firestone, Amy Lorenc, and Ben Ranish at the Board of Governors of the Federal Reserve System found that the “optimal bank capital levels in the United States range from just over 13 per cent to over 26 per cent”.

Given all that, Kress says Dimon’s prepared remarks (he’s due to speak with the House committee later today) amount to “disingenuous” political point-scoring. “He’s describing very serious, very complex issues in a misleading way”.

JPMorgan didn’t immediately respond to a request for comment, but we’ll update if they do.