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Dick Bove: No Reason to Break Up Big Banks

JPMorganChase
Photo by: Salim Virji
JPMorganChase

JPMorgan’s much ballyhooed $2 billion loss is no reason to ramp up regulations, noted bank analyst Dick Bove said Monday.

“I don’t think there’s any reason to break up the big banks,” he said on CNBC’s “The Kudlow Report.” “Particularly if a bank can earn $18 billion a year and $22 billion the next year, why in heaven’s name would you say it can’t be run?”

The Rochdale Securities analyst rejected the notion that JPMorgan Chase, which last week disclosed it had made a bad hedge, was in any sort of long-term financial trouble.

“It has $2.3 trillion worth of assets. It has $1.1 trillion worth of deposits,” he said. “That means there’s $1.2 trillion of wholesale-funded assets, which are used to do this trading. There are no taxpayer dollars involved.”

Bove also dismissed the idea that FDIC-insured deposits were being gambled.

“There’s absolutely no reason in the world that you would have to dip into retail deposits to fund what you’re doing in trading. It makes no sense,” he said. “And it’s against the way a bank is constructed. They don’t use retail deposits to fund the security portfolio. That’s done with borrowed money, and it’s done with capital, or equity. They did not use taxpayer money — or deposits, or retail deposits, or whatever you want to call it — to fund these transactions.”

Peter Wallison of the American Enterprise Institute pointed out that banks are allowed to hedge, siding with Bove on the matter.

“It doesn’t matter what funds they’re using,” he said. “They didn’t use taxpayer funds. They didn’t use insured funds.”

The problem, Wallison said, is this: “It is very difficult to tell whether a trade is a hedge or a trade is a proprietary trade, and for that reason, the Volker Rule is worthless. It’s unworkable. It should be handled solely by the bank examiners doing supervision, but not through any kind of regulation.

“This was a $2 billion loss. It sounds like a lot, but it’s one one-thousandth of the assets of this bank,” he said. “The media has blown this completely out of proportion.”

Bill Isaac, former chairman of the Federal Deposit Insurance Corporation, said that the derivatives deserved a look.

“I don’t think we understand them very well, and that concerns me,” he said.

What happened with JPMorgan raised a question is Isaac’s mind.

“I think the issue is: Did they have enough capital to cover this risk they take and all the other risks they take and not jeopardize the taxpayers,” he said. “I think JPMorgan passed that test. They have $200 billion in capital vs. $2 billion in losses.”

Isaac, who now chairs Fifth Third Bancorp, said last week that some banks were, in fact, “too big to fail.”

On Monday, he echoed a similar sentiment.

“I really think that we’ve got to look at these institutions, and we have to have a much better regulatory system in place than we have today,” he said.

Tune in:

"The Kudlow Report" airs weeknights at 7 p.m. ET.

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