JPMorgan Trails Proposed U.S. Capital Rule Dimon Dislikes
JPMorgan Chase & Co. (JPM)’s ratio of capital to total assets falls short of a proposed U.S. minimum that Chief Executive Officer Jamie Dimon criticized for diverging from the standard other nations’ lenders face.
JPMorgan’s so-called leverage ratio at its holding company is 4.7 percent, below the 5 percent proposed U.S. minimum, the New York-based bank said today in a presentation. The ratio at its deposit-taking subsidiary is even lower, creating a wider gap to the 6 percent proposed standard for those units, Chief Financial Officer Marianne Lake said on a conference call.
The U.S. plan goes beyond the 3 percent global minimum requirement that the Basel Committee on Banking Supervision approved to help prevent a repeat of the 2008 financial crisis. The changes would make lenders fund more assets with capital that can absorb losses instead of using borrowed money.
“If one is 3 percent and one is 6 percent, that becomes just too big, and over time it can have huge competitive effects,” Dimon said on the conference call with analysts. “We always ran with higher capital and liquidity than most of our competitors.”
JPMorgan said it plans to be in line with the holding company standard by the first quarter of 2015. The company plans to bring the federally insured bank subsidiary into compliance by the end of that year, Lake said.
The bank said it can increase its holding company leverage ratio by 60 basis points, or 0.6 percentage points, with capital generated from earnings through the next six quarters if it keeps payouts to shareholders constant. JPMorgan could also boost the ratio as much as 1 percentage point by issuing preferred shares and making adjustments such as unwinding derivative bets, according to the bank’s presentation.
Dimon said the company can achieve the new ratios and accelerate share buybacks and dividends over the next few years.
The proposed U.S. rule will add unfunded commitments and some derivatives exposure to banks’ stated assets. That will increase JPMorgan’s total assets by about $1 trillion from the $2.4 trillion on its balance sheet.
The Basel committee has proposed additional increases to asset calculations, which Lake said could have a “not insignificant” impact on the ratio. Lake also said there is a “strong argument” that the firm’s more than $450 billion of cash and highly liquid assets should be excluded from the calculation.
The leverage ratio provides an additional measure of capital to Basel III ratios that weight assets based on risk, which results in an asset figure that is half of that under the leverage ratio. The firm said its Basel III Tier 1 common ratio climbed to 9.3 percent and plans to reach 9.5 percent by the end of the year.
“We believe the leverage ratio is an appropriate complement to a Tier 1 common ratio, if properly calibrated,” Lake said.