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Fed's Kashkari says JPMorgan's Jamie Dimon is dead wrong about banks

Minneapolis Fed President Neel Kashkari is taking on the financial world's perhaps most well-known and powerful name — JPMorgan Chase CEO Jamie Dimon, whom the central bank official said recently made "demonstrably false" statements about the industry.

In his annual letter to investors, Dimon said "too big to fail" fears have been eradicated. The expression stems from the financial crisis, when taxpayers were on the hook for billions in bailouts to the financial industry. Dimon contended that banks are well-capitalized and well-regulated enough to sustain shocks similar to what happened during the crisis.

Kashkari disputed both points. He said bank equity won't be near enough to help the industry in the case of another crisis, and believes regulators are still being too easy on banks.

"Although capital standards are higher than before the last crisis, they are not nearly high enough," Kashkari said in a blog post on Medium.com. "The odds of a bailout in the next century are still nearly 70 percent."

A Fed analysis concluded that banks should be able to able to handle a 20 percent loss on assets during a crisis. To get to that level, bank capital standards should be doubled from current levels, Kashkari said.

Officials at JPMorgan did not immediately respond to a request for comment.

JP Morgan Chase Chairman and CEO Jamie Dimon listens during an Institute of International Finance panel discussion in Washington, Oct. 10, 2014.
Andrew Harrer | Bloomberg | Getty Images
JP Morgan Chase Chairman and CEO Jamie Dimon listens during an Institute of International Finance panel discussion in Washington, Oct. 10, 2014.

Kashkari has been something of a maverick during his stint at the Fed that began in 2016. He has consistently railed against the size of big Wall Street institutions, and he was the lone dissenter against a Fed rate hike in March.

Dimon indicated in his letter that post-crisis regulatory changes will make it easier to convert debt to equity during the next downturn.

However, Kashkari argued that governments have long been reluctant to hurt bondholders, who tend to assume they'll be bailed out during a crisis. On the regulatory side, he said bank stress tests are only "hypothetical scenarios" that won't protect against a crisis that no one will see coming.

"The most recent crisis showed that even some debt holders who had been explicitly told that they would take losses during a crisis got bailed out," he wrote.

"Only true equity should be considered loss-absorbing in a crisis. The largest banks do not have enough equity today to protect taxpayers," Kashkari added. "Too big to fail is alive and well. Taxpayers are on the hook."

Watch: JPM's Dimon on regulation