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Not That He's Volunteering

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JPMorgan earnings this morning were a bit disappointing, with investment banking revenue down 30% y/o/y in what may be a bad sign for the rest of the industry, but the Jamie & Doug In The Morning Show remains finance's top-rated program in its time slot and it did not disappoint today. This is in part because the callers have learned how to play to the hosts' strengths; my favorite part of the call went something like this (paraphrasing slightly):

Jamie Dimon: Ooh I hates me some regulators. Next question?
Analyst: Wow. After Jamie's speech about regulators, my question is going to sound really mundane. [Asks mundane question]
Braunstein: [Gives mundane answer]
Analyst: So, Jamie, do you want to say anything more about regulators?
Dimon: Sure! [Does]

But Dimon's statement that "basically there's no one in charge of the global financial system" was more or less unprovoked. It was also the main theme of his remarks, particularly about Europe, where "regulatory policy is completely contradictory to government objectives" as the ECB throws gobs of money at banks to encourage them to lend and keep their governments afloat, at the same time that regulators tighten capital standards, reducing lending, and crack down on holdings of dicey peripheral government bonds. For himself, he's a big fan of the ECB's work on liquidity, less keen on Basel et al.'s work on capital requirements. There is no book-talking whatsoever here.*

It's probably fair to complain that European regulators are being pro-cyclical by tightening capital requirements in times of stress, while the ECB is being (appropriately) counter-cyclical by lending oceans of money at long term against any crap securities that a bank can scrape together, and that some more coordination among the two might better accomplish European governments' objectives of continuing to finance their particular crap securities with ECB money (not that that's their objective) and keeping their banks more or less alive.

But! Hey! Didn't those objectives sort of get us into this mess?** One thing you could think about the European crisis is that it was caused by the interaction of (1) European governments issuing too much debt that was underpriced due to financial repression and/or daffy risk-weighting of Eurozone government bonds and (2) European banks that were undercapitalized due to general overoptimism/underregulation and specific daffy risk-weighting of Eurozone government bonds.

Now, of course, like the man said, "The boom, not the slump, is the right time for [fixing your too-lenient capital rules]." But you can probably think a wide range of thoughts about when and how much to cut back on risk when you're in a crisis, and there's a plausible argument that starting the long slow process of recapitalizing European banks now will shore up confidence and improve capital markets performance more than would allowing them to limp along without dumping assets but also without doing much to fix their balance sheets. My own views are mostly closer to the Dimon-Krugman camp (is that a thing? it should be) of "current global financial policy is too pro-cyclical too soon," but, y'know. Those guys have their biases.

The way things are now in Europe, no one gets everything they want but everyone gets something. Banks get the tailwind of long-term liquidity and lowered scrutiny of assets for funding purposes; they also get the headwind of repairing/increasing capital and higher scrutiny of assets for capital purposes. This strikes me as approximately the right compromise. (At least, it dominates the reverse: lower capital requirements and cut off cheap and easy funding.)

I suppose that if you offered Jamie Dimon the post of "guy in charge of the global financial system," he'd take it. (Actually he probably wouldn't. What are the hours?) And, with no ill intent whatsoever, he'd probably do some things that would make banks very happy but might leave the world a bit less well positioned for the next crisis. But, Ron Paul, or a whole variety of tough-love-and-no-ECB-money-for-the-banks types, would also probably be willing to take the job, with pretty opposite results. Right now you've got bankers at the ECB and tough-love types in Basel. (And other public and quasi-public bodies floating around taking their own potshots, like the occasionally inept but newly feisty ratings agencies.) And the result is - uncoordinated, self-undermining, messy, but also stumbling toward decent results for European banking. The lack of someone in charge - the existence of some push and pull, some bid and offer around how much bank repair to do now and how much to defer until the crisis is past - strikes me as a good thing, making the financial system more robust in the long run.

Jamie Dimon: Regulators Undermining Economic Objectives [NetNet]

* Actually, as Dimon noted, the capital requirements help JPM a bit competitively, because they cause undercapitalized European banks to hive off assets at soft-if-not-fire-sale prices. But they also keep JPM from buying some of those assets because they can't get good enough RWA-adjusted returns. Plus the whole if-European-banks-are-at-death's-door-all-the-time-that's-probably-not-good-for-their-counterparties thing.

** "No" is a plausible answer. It's just, like, an opinion, man; I'm not even sure it's my opinion. But, I mean, unlimited borrowing in a currency that you don't control definitely seems like it falls in the category of things that are great until they aren't.



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