Nations and shareholders vs bankers
James Saft is a Reuters columnist. The opinions expressed are his own.
HUNTSVILLE, Ala. — It looks as if patriotism is the last refuge of bankers.
Jamie Dimon, chief executive of JP Morgan Chase, on Monday inveighed against new Basel III banking regulations which will impose higher minimum levels of capital adequacy on banks.
“I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” Dimon told the Financial Times. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.”
Dimon objects to the imposition of an additional layer of capital of 2.5 percent, to rules which limit how banks can count income from collecting and distributing mortgage payment as capital, and to liquidity regulations which he said favor covered bonds, a type of fund-raising more prevalent in Europe.
“I think any American president, secretary of Treasury, regulator or other leader would want strong, healthy global financial firms and not think that somehow we should give up that position in the world and that would be good for your country,” said Dimon. “If they think that’s good for the country then we have a different view on how the economy operates, how the world operates.”
The amazing thing is that many bank shareholders may feel he is arguing their corner. He isn’t; shareholders are the other major victim of a financial system which is overly complicated and opaque and allows far too much of the profits to walk out the door in the pockets of employees at the end of every day. And because they are also presumably taxpayers, bank shareholders are doubly left holding the bag, first on an ongoing basis when revenues fail to compensate them adequately for their risks, and secondly every few years when the whole thing blows up, killing their share prices anew and socking them with liability for the government debt issued to clean things up.
Arguably equity investors who aren’t even bank shareholders also pay a price. Overly complex banks offering overly complex services serve as a tax on the rest of the economy, diverting money from where it could best be invested for growth and jobs, weighing down other sectors with unprofitable and unneeded financial services, and every few years hitting the entire market when the tent blows off the circus.
SIMPLICITY, TRANSPARENCY = PROFITS
While there can be no substitute for regulation, as implied government guarantees underwrite and subsidize much banking activity, there really is a need for shareholders to militate for simpler banks, and a shrinking financial services sector. Shareholders would benefit even as revenues fall, as more transparent banks would be easier to manage, making it easier for investors to see who really is adding value and who is simply arbitraging the bank’s balance sheet and government guarantee. Compensation would fall, allowing shareholders to capture more of the pie. Earnings and share price volatility would also fall, both in the short and long runs, allowing investors to pay a higher price for a more secure stream of income.
A smaller banking sector would also very likely allow the rest of the economy, and by extension the stock market, to do better over the long term. While there can be no doubt that higher bank equity and a shrinking financial sector will hurt growth during the transition period, it is very likely going to prove a good bargain over time.
Dimon’s line is very similar in cast to the argument advanced by British bankers against newly proposed regulations there which would force banks to carry higher capital and build moats between their boring, utility-like functions and riskier investment and wholesale banking. Arguably too weak, these regulations are far stricter than what Dimon has to contend with at home. Here too, industry advocates say that Britain will suffer, as banking goes offshore, and as economic growth is stifled.
Britain have been particularly badly served by its banks, which have enabled it to pile up an unsustainable level of debt (232 percent of GDP combined household and corporate) while charging too much in fees for services and, in the end, landing the public purse with a massive bill for implicit and explicit guarantees.
The argument that this is bad for Britain and the U.S. should be turned on its head; decline in financial services is inevitable, managed decline is by far the best route.
Shareholders, of all stripes, should wake up to this and push for it. If government does not oblige with tighter regulation and simpler structures, they should, as they have been doing, vote with their feet.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)