One of the pleasures of every JPMorgan quarterly earnings call is hearing Jamie Dimon’s, and now Marianne Lake’s, authoritative-sounding pronouncements on proposed regulations. You sometimes get the sense that regulations can’t be adopted without Dimon’s approval, so his views on these calls provide some sort of indicator of which of the proposals might actually happen. Plus, general amusing orneriness.
So how’d everyone do? Well, they think Nouveau Glass-Steagall is pretty silly, for one thing: in response to an analyst question about it, Lake said “we don’t spend much time thinking about it.”1 Oof! Get outta here with your Glass-Steagalls.
But the theme of the call was mostly “could you tell us more about your leverage ratio?” Here, JPMorgan is not so fond of the new Basel III leverage ratio proposals. The earnings deck walks through how JPMorgan will comply with the new U.S. leverage ratio rules, but it does not do any math on the effects of the new Basel proposals to do creepy things like disallow derivatives collateral netting. When asked to quantify the leverage under those proposals, Lake and Dimon declined, saying that there are “fundamental problems” with those proposals. So they have chosen to ignore them and, presumably, they will go away.
They seem fine with the U.S. leverage ratio though? There’s some whining about fairness, and some discussion of things like whether cash should be counted in the denominator, but they don’t seem to mind the increase in leverage ratio requirements to 5% for JPMorgan and 6% for its insured bank. Right now JPM is at 4.7%, and are pretty sure they’ll get to 5% by 2015 at the latest. In response to questions, Lake made clear that they hope to increase capital distributions in 2014,2 and still comply comfortably with the 5% requirement.3
Which I guess is an advertisement for the reasonableness of that requirement? You can have a parade of horribles that might be caused by higher capital requirements but the most immediately obvious is just “they will slightly slow the pace of banks’ share repurchases.” Even that’s too strong: for JPMorgan, the main effect of the higher leverage ratio will be to slightly slow the rate of increase of its share repurchases.
Though they list other things too:
Balance sheet actions may include
- Reprice/restructure certain commitments and/or unwind derivative positions
- Limit non-operational wholesale deposits
- Optimize use of central clearing
- Incent business unit and entity level efficiencies
The horribles maybe caused by capital requirements usually include “banks won’t lend enough if they have to hold more capital,” which is somewhat absent from this list, though “Incent business unit and entity level efficiencies” can cover a lot of horribles.
But I’ve always thought the more fun worry is “banks won’t borrow enough if they need to get more of their funding from equity”: people like to lend money to banks, in the sense that putting money in banks makes them feel that their money is safe and accessible. If you make banks borrow less, then they have less ability to provide that valuable service to customers. JPMorgan will “Limit non-operational wholesale deposits” because Borrowing Is Bad, but presumably the people making those non-operational wholesale deposits disagree. Now where will they put their non-operational money?
1. To be fair the question was pretty silly. It was like, “if new Glass-Steagall is adopted, will that hurt your ability to cross-sell?” I mean! “If JPMorgan is broken up, will that pose any challenges to your businesses?” Whose businesses?
2. To get a sense of priorities, they apparently have 500 people devoted to the C-CAR/stress test/capital-return-approval process. Which: is a lot?
3. There’s also a 6% requirement for the FDIC insured bank, but they’re not worried about that – “the binding constraint is the 5%.” Because you can just shuffle things around internally to get the 6% at the bank. Just capitalize less-regulated entities more thinly. They’re pretty blasé about this, which I feel like someone could worry about if they wanted to? “Oh yeah we’ll get 6% capital at the bank by moving the scaaaary derivatives book to a new entity with like forty bucks of capital.” What could possibly etc.