Jamie Dimon has been noisily protesting the idea of an additional capital buffer for weeks. Last week, Dimon, the chairman and chief executive of JPMorgan , said his bank probably would not hold onto any mortgages if it needed to set aside additional capital. The mortgages would be worth more to a smaller bank not burdened with the capital requirement.
“Why would we own mortgages if you can own them at 7 percent capital and I have to own them at 10 percent?” Dimon said. The bank will still originate mortgages, “I just don’t own them,” he is quoted in a Bloomberg story as saying.
Dimon went on to say that the capital buffer would have “consequences that I don’t think they’ve really thought about.”
This is where Dimon is half right, and half wrong. He’s right that the biggest banks will find certain kinds of lending more expensive under the proposed capital buffer. It will be cheaper from smaller banks not required to hold additional capital against assets to fund many types of loans.
But where he goes wrong is considering this an unintended consequence of the rules. Getting JP Morgan out of the business of owning home loans is not a bug of the capital buffer, it’s a feature.
Too much of our banking system is dominated by goliath national banks.
If new capital requirements force these goliaths to exit certain businesses, we’re all better off for it.
Regulators are not only aware that the new rules can have this effect—they’re planning on it.
Here’s a few sentences from a recent speech by Fed governor Daniel Tarullo that makes exactly this point: We want to reduce the dominance of "too big to fail" banks in many markets.
To the degree that systemically important institutions find the additional capital requirement makes some lending unprofitable, that lending could be assumed by smaller banks that do not pose similar systemic risk and thus have lower capital requirements. To be sure, there may not be perfect substitution, particularly not in the short term. In part for that reason, we contemplate a fairly generous transition period to the SIFI capital regime. In addition, though, it is worth recalling that not every additional dollar of lending or capital market activity is necessarily socially optimal. Just as monetary policy must at times induce higher credit costs in order to forestall the wider problems that high inflation would bring, so some checks on the scale of SIFIs are warranted to avoid a repeat of the financial crisis.
In other words, the point of the capital buffer is to act as a check on the scale of these giant banks. Lawmakers failed to break up the banks, but regulators can now act to at least slow down their growth.
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