JPMorgan No Longer $20 Billion in Hole for Fed Capital Demand

JPMorgan Chase & Co. was singled out last year for being the only major U.S. bank that didn’t have enough capital set aside to overcome the perception it’s too big to fail. But that was then.

As the Federal Reserve prepares to finalize the capital requirements for eight heavyweight lenders on Monday, JPMorgan says it’s much closer to nearing the gap on what the Fed identified as a $20 billion shortfall. And Chief Executive Officer Jamie Dimon said this week that the effort to improve the capital ratio won’t stop.

The Fed wants to make sure the biggest and most complex banks have an extra buffer to withstand a crisis, and it’s linking those charges to each lender’s importance to the global financial system. If banks continue to be giant and intertwined, they’ll get tagged with a few percentage points of surcharge for the privilege.

“Historically, when these rules get proposed they tend to be really, really, really bad for banks,” said Jason Goldberg, an analyst at Barclays Plc in New York. “And the final results tend to be just really, really bad.”

JPMorgan has reduced non-operating deposits by more than $100 billion, lowered trading assets by billions and piled up more capital to prepare for the demands. The bank is assuming it’ll be hit with the toughest capital cushion, which is 4.5 percent of its assets weighted for risk.

Citigroup, Wells

One of the measures JPMorgan said in February it planned to take was charging hedge funds and other institutional clients for holding non-operating deposits, or those that aren’t immediately required for a client’s business.

The New York-based bank will also face the 7 percent capital target that most of the industry must meet, in addition to the 4.5 percent. That probably won’t be a problem because it should be able to fulfill 11.5 percent by the end of this year, Goldberg said.

The banking industry’s push to increase capital since the 2008 financial crisis has put most of the big banks in position to exceed the new regulatory demands. JPMorgan was the only firm with a capital deficit when the Fed proposal was announced in December, though the rule doesn’t take effect until 2019. The Fed wasn’t going to single out JPMorgan and its shortfall, but Fed Vice Chairman Stanley Fischer undermined those plans by naming the lender at a December public meeting.

A Nomura Securities International Inc. analysis earlier this year said Citigroup Inc. would have the second-highest capital requirement -- termed “surcharges” by regulators -- and Wells Fargo & Co. would have the lowest. The five other banks subject to next week’s capital super-sizing include Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp. and State Street Corp.

Creating Incentives

These megabanks are already supposed to maintain a much bigger cushion of capital than they had to before the 2008 financial crisis, and will now face an add-on ranging from 1 percent to 4.5 percent of their risk-based assets, if the Fed hews closely to what it said last year. The new rule is intended to avoid a repeat of the meltdown.

The Fed is subjecting U.S. firms to a tougher capital requirement than peers abroad -- in some cases almost two times the extra capital demand faced by foreign competitors, according to what the agency proposed in December. The regulator said it also wants to tie the additional cushion to how much each firm relies on the kind of risky, short-term funding that froze up in the crisis.

Fed Chair Janet Yellen said one goal of the surcharges was to encourage banks to shrink. She mentioned the capital rule in a Senate hearing this week, saying it will “diminish the risk” in U.S. banking and “create incentives for the footprints to be reduced.”

Stress Tests

At their meeting Monday, Fed governors also will consider rules for their supervision of General Electric Co.’s finance unit. GE Capital is subject to Fed oversight because it’s been designated a systemically important non-bank by a group of U.S. regulators.

Another question for banks to consider is whether the Fed will include the capital cushion in the math behind its annual stress tests. That could require financial firms to set aside even more capital so they could still be solvent in a stressed situation.

The Fed said in December that it was looking into factoring surcharges into the tests, though that would require a separate rule. On July 9, Fed Governor Lael Brainard said “it will be important to assess incorporating the risk-based capital surcharge in some form,” reinforcing the industry’s expectation it’ll happen.

“The door has clearly been left open for that,” JPMorgan Chief Financial Officer Marianne Lake said during this week’s earnings call. She also said a new stress-test hurdle would impact all the big banks evenly.

“If everybody has to increase their minimum, it’s going to be a similar position for everyone,” Lake said.

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