Wednesday, June 8, 2011

Jamie Dimon Takes On the Government

I've written several times over the past week about my concerns regarding big banks.

It's not so much that I think we're heading for a repeat of the credit crisis of 2007-08. I think that the aggressive Fed intervention in the capital markets has mitigated this risk.

No, the problem for the banks is more fundamental. First, loan growth remains tepid. True, some sectors - like small business lending - have shown some signs of life over the last few weeks. Overall, however, weakness in housing, and general caution in Corporate America, has left the banking system awash in liquidity, and a dearth of qualified borrowers.

The other potential problem is regulation. The final details are yet to be ironed out, but it currently appears that US banks in general - and money center banks in particular - are going to have to add considerably more capital cushion than is currently required.

If the banks are forced to increase their capital, this will almost certainly drive down returns.

This prospect does not make Jamie Dimon of JP Morgan happy. Mr. Dimon has been quite vocal recently with his dissatisfaction of the proposed changes in capital requirements. Since he is head of one of the largest banks in the world - and arguably the most widely followed - his comments have received widespread notice.

It's hard to know whether Dimon is simply posturing for negotiations that are currently occuring behind closed doors, or whether he has already lost the argument. Still, it is certainly worth following.

Here's an excerpt from a column from CNBC (via the blog Net Net):

... it seems that what provoked Dimon were recent signals from a Fed governor that the largest banks might face an additional capital surcharge, above and beyond the new capital and liquidity requirements agreed to last year in Basel.

At Basel, regulators agreed to more than double the minimum common equity requirement for banks to 4.5 percent from 2 percent, with an added liquidity buffer of 2.5 percent. That means banks will have to have total risk reserves of 7% of weighted assets. Regulators did not reach a consensus on proposals for an additional buffer—or "surcharge"— for "systemically important financial institutions"—which is regulator speak for Too Big To Fail.

Many of the largest European and American banks have been lobbying hard against the new surcharge, but these efforts appear to be failing.