Pity poor Jamie Dimon. Sure, his firm JPMorgan just announced a profit of almost $50 billion for 2023, setting a new record for any US bank. And its global dominance of investment banking and markets revenues became even more entrenched, with the firm claiming an increase of 1% in market share.
But the brow of the longest-serving Wall Street chief executive will remain furrowed until the Federal Reserve and other US regulators make big changes to the way they propose to implement the Basel III capital rules.
Dimon revisited his opposition to the planned increase in capital requirements when he announced JPMorgan’s record profit haul in January.
“We continue to believe that the recent series of regulatory and legislative proposals, including Basel III endgame, could cause serious harm to consumers, businesses, and markets. We hope that regulators will make the necessary adjustments so the rules promote a strong financial system without causing undue consequences for end users,” he said in the opening paragraph of his comment for JPMorgan’s earnings announcement.
That was relatively restrained language compared with some of Dimon’s previous remarks about the Fed’s capital plans, which may reflect a belief within JPMorgan that a regulatory climb down is likely.
Dimon has also shifted to allowing Jeremy Barnum, his chief financial officer, to make most of the comments about opposition to the Basel III proposals, including in a comment letter and during JPMorgan’s fourth-quarter and full-year 2023 earnings calls with analysts.
That reduces the risk of Dimon making inflammatory comments about regulators or seeming to be crying wolf by exaggerating the potential impact of higher capital requirements.
A great opportunity
On the bank’s third-quarter earnings call in October, Dimon highlighted what he called a “great opportunity for European market makers” from potentially stricter US application of Basel III rules, for example.
“I mean, a great opportunity, like they can do repo and FX and swaps and credit and stuff with 30% less capital. That is a big difference in that kind of business,” he said, warming to his theme.
That is a bit of a stretch, and must have caused some rueful chuckles among European bank heads who have seen their share of market-making revenues evaporate since the 2008 global financial crisis.
European banks don’t even feature in the top five for investment banking revenue generation in their own region, where US firms led by JPMorgan dominate.
In the biggest single business line for both market making and overall investment banking – fixed income trading – Europe’s leading investment bank, BNP Paribas, is lucky to generate 25% of JPMorgan’s revenue in a typical quarter.
There is still time for a face-saving compromise to be reached between US banks and their regulators over Basel III implemen-tation
Dimon may have been convinced by his lieutenants that complaining about threats to JPMorgan’s market-making dominance were unlikely to generate sympathy, because the bank’s emphasis in its more recent opposition to the Basel III implementation proposals has been on a potential threat to access to financial products for customers.
JPMorgan and other Wall Street firms must have been pleasantly surprised by the speed with which a coalition of US Basel III implementation opponents has been formed recently.
Banking trade groups have been able to enlist public support from a wide variety of Democratic politicians, as well as the Republicans who can be expected to oppose tighter regulation.
Civil rights and affordable housing advocates have also complained about the potential for the capital proposals to reduce mortgage availability.
And big US corporations that use derivatives, including firms such as AT&T and IBM, have weighed in with detailed complaints about the potential effect on market liquidity and efficiency, and the threat of higher hedging costs if bank dealers are forced to hold more capital against their trades.
This gives the big US banks, and bankers like Dimon, some time to consider whether they want to threaten what is effectively the nuclear option of suing their regulators to delay or prevent Basel III implementation as it is currently proposed.
Chevron deference
A big shift in the way regulation of any type is enforced in the US is serving as a backdrop to the wrangling over the details of Basel III implementation, such as how to account for operational risk and derivatives trades.
As the coalition of the unwilling to endorse the proposed Basel endgame added to its list of supporters in January, the US Supreme Court was hearing a challenge to the principle of deference to agency decisions.
This principle is known as the 'Chevron deference' after a 1984 case that established a precedent that judges should defer to reasonable interpretation of ambiguous statutes by agencies, in effect giving regulators scope to enforce their own rules.
There is a widespread assumption that the Supreme Court, which is now dominated by conservative judges, will soon overturn this precedent – an assumption that was backed by oral arguments about the principle from justices such as Brett Kavanaugh and Neil Gorsuch on January 17.
Eugene Scalia, who served as Labor Secretary under Donald Trump and is the son of the late Supreme Court justice Antonin Scalia, has been a vocal opponent of the principle of Chevron deference.
Scalia has also reportedly been preparing a legal challenge that could be lodged by the Bank Policy Institute to try to prevent the Fed, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, from implementing their Basel III plans.
As is often the case with Washington lobbying, there are numerous connections between combatants in the battle over the appropriate role for government.
Scalia is a partner at law firm Gibson Dunn, as is Michael Bopp, who coordinated the complaints from corporate end users of derivatives about Basel III implementation, for example.
But while the heads of the biggest Wall Street banks may be congratulating themselves on the growing likelihood that the Fed and other regulators will back down on some details of the new capital framework, they should think twice before endorsing a broader assault on US regulation.
Careful
Big US banks have in the past been happy to promote their high capital levels as a source of strength, including JPMorgan’s relentless stress on its 'fortress' balance sheet.
It would be a shame to risk that projection of strength for a regulatory battle that might have an uncertain outcome. Even in a year that could end with the re-election of Trump as president, regulators such as Fed chairman Jay Powell and his supervisory head Michael Barr can be expected to react badly to being sued by the banks they supervise.
And there is still time for a face-saving compromise to be reached between US banks and their regulators over Basel III implementation.
Technical details such as the treatment of operational risk and derivatives trades could be amended without abandoning the principle that overall bank capital should rise – which itself is not a controversial proposal as the anniversary of last March’s US regional banking crisis approaches.
Then Dimon and Barnum could get back to the core business of serving clients – and trying to beat their own record of generating $50 billion of profit in a year.
