Bank reform JPMorgan Chase and the case for the defence

Bank reform
JPMorgan Chase and the case for the defence
Jun 16th 2011, 13:57 by A.P.

BANKING is an industry that lacks acceptable faces. The bail-outs are too fresh and the bonuses too large for it to be otherwise. But if any institution has a chance of being heard on the topic of financial regulation, it is JPMorgan Chase (JPM), a big bank that helped to pick up struggling rivals during the crisis and can argue more plausibly than others that it could have got through the maelstrom without equity injections by the American government.

JPM is using that platform. The bank’s feted chief executive, Jamie Dimon, questioned Ben Bernanke, the chairman of the Federal Reserve, last week about the economic impact of new rules (Mr Bernanke, in effect, shrugged). And today, Barry Zubrow, the bank’s chief risk officer, will give congressional testimony to the House Financial Services Committee in which he argues that the regulatory pendulum has swung too far.

As a case for the defence, his prepared remarks are well worth reading. He legitimately asks what the cumulative impact of new regulations is, and queries the consistency with which rules are applied internationally. But the thing Mr Zubrow is most exercised about is a planned additional capital surcharge on global systemically important financial institutions, or G-SIFIs in the jargon. The scale of that charge is still being debated, although a range of 1-3% is often mentioned (some would go higher). The thrust of Mr Zubrow’s argument is that a meaningful extra layer of capital of 1% or more, on top of the minimum 7% requirements that the new Basel 3 regime imposes, is unnecessary and damaging.

For all the belly-aching about banks, it is true that the Basel 3 minimum standards represent a big turning of the capital screw compared with pre-crisis norms. Mr Zubrow calculates that the 7% minimum would enable the nine US banks likely to be designated G-SIFIs to absorb an immediate loss equal to two years’ average losses during the crisis and maintain a 5% capital cushion. JPM itself went into the crisis with that level of capital, he points out, and did fine. To the question how much capital is enough, Mr Zubrow’s answer is about what JPM held.

This analysis ignores a couple of things. The first is that banks benefited from all sorts of government initiatives to support them (like having their debt guaranteed), not just equity injections. Rules on liquidity would have obviated the need for some of these measures. But more capital would also have helped.

More important is the risk that a big bank could lose more than the minimum capital amount. Several did during the crisis. If regulators could find a way to ensure that the crummiest banks can fail safely without imposing losses on taxpayers, that would be an argument for being more relaxed. But that goal would itself involve a more expensive capital structure in the form of a layer of debt that can turn into equity in an emergency; it is in any case a long way from being reached.

In the meantime, there is a strong conceptual argument for an extra layer of capital that puts a bigger buffer between the banks that would most need saving and the taxpayers who would have to fork out. That layer could, of course, be piled on too thickly: calls for an extra common-equity surcharge of up to 7% (on top of the Basle 7%) look overdone. It could also be implemented inconsistently across different countries, disadvantaging American banks. If anything, however, the consensus is being forged in Europe around a reasonable level of protection: this week the Swiss and British authorities both endorsed a common equity ratio of 10% for their biggest banks. Mr Zubrow raises some important points but a bit more padding wouldn’t hurt.