JPMorgan Chase & Co. Chief Risk Officer Barry Zubrow will tell Congress that regulators risk impeding the economic recovery by going too far in tightening bank rules and raising capital requirements.
“The regulatory pendulum clearly has now begun to swing to a point that risks hobbling our financial system and our economic growth,” Zubrow said in testimony prepared for delivery tomorrow to the House Financial Services Committee.
A capital surcharge on the largest global banks combined with higher U.S. margin requirements for certain trading accounts “currently risks doing more harm than good,” Zubrow said. It also puts U.S. firms at a “distinct and unnecessary competitive disadvantage,” he said.
The remarks echo concerns expressed by JPMorgan Chief Executive Officer Jamie Dimon earlier this month, when he asked Federal Reserve Chairman Ben S. Bernanke whether he’s concerned that overzealous regulation will stymie an economic rebound.
Zubrow is scheduled to testify along with Stephen O’Connor, a managing director at New York-based Morgan Stanley, and regulators including Federal Deposit Insurance Corp. Chairman Sheila Bair and Fed board member Daniel Tarullo.
Zubrow also said he opposes proposed rules that require companies to post extra margin against certain derivatives contracts, which are used to hedge interest-rate, currency and other risks. The rules restrict the types of collateral that may be posted to U.S. cash, Treasuries or agency securities. They also would require U.S. banks to demand collateral from foreign clients while European competitors don’t, he said.
“In addition, we are not permitted to accept margin in the form of, for example, Euro Cash and G7 Sovereign Debt,” Zubrow said. “This effect will be to kill our overseas swaps activities; even if Europe and other regulators were to subsequently adopt similar rules, it would be too late.”
O’Connor, chairman of the International Swaps & Derivatives Association, also will tell Congress tomorrow that policy and timing disparities between U.S. and international derivatives rules will disadvantage the nation’s financial markets.
The differences will hurt the U.S. “by driving up costs and reducing liquidity,” O’Connor said in prepared remarks. “They do so without demonstrating any clear benefit to equal or outweigh the considerable costs.”
‘Race to the Bottom’
Michael Gibson, senior associate director of the Federal Reserve, told the Senate Agriculture Committee today that global regulators should harmonize rules on derivatives to prevent financial risks from migrating to the least-supervised economies. Treasury Secretary Timothy F. Geithner said earlier this month that he favored having global authorities agree on a minimum level of regulation to avoid a “race to the bottom” among countries.
The U.S. Commodity Futures Trading Commission, required by the Dodd-Frank Act to write new regulations for the $601 trillion over-the-counter swaps market, may enter agreements with foreign officials to recognize comparable rules, Gary Gensler, CFTC chairman, told the Agriculture Committee today.
Dimon, who’s also chairman of New York-based JPMorgan, questioned Bernanke at a June 7 conference of bankers in Atlanta on whether regulators have gone too far in reining in the banking system and are slowing economic growth. The U.S. unemployment rate rose to 9.1 percent in May as the S&P/Case-Shiller index of property values in 20 cities showed that home prices slumped in March to their lowest since 2003.
“I have a great fear someone’s going to try to write a book in 20 years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery,” Dimon, 55, told the Fed chairman.
Proposed global capital standards would impose a 3 percent surcharge on top of a 7 percent minimum requirement on the largest systemically important financial institutions, or SIFIs. The rules are being drafted by a group of bank regulators who are scheduled to decide on a preliminary plan this month and present a final proposal to the G-20 group of nations in July.