JPMorgan Chase has a $22 billion capital hole under new rules proposed by the Federal Reserve on Tuesday, a blow to a bank which has long boasted of a "fortress balance sheet".
The Fed is introducing new capital requirements for systemically important banks, which go beyond the minimum international standards in an effort to protect the US financial system from the collapse of a large institution.
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Officials had not intended to release the fact that JPMorgan had a large capital hole under the new framework. They said only that there was an aggregate shortfall of $21 billion from eight banks: , , , JPMorgan Chase, Morgan Stanley, Wells Fargo, Bank of New York Mellon and State Street.
But at a Fed meeting, during an exchange with Stanley Fischer, the vice-chairman of the Fed, and Fed staff, it emerged that JPMorgan accounted for the entire shortfall and every other bank already met the estimated requirement with room to spare.
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"[It is] the firm that is actually going to have to come up with more capital," said Mr Fischer. He said "that seemed a pretty impressive shortfall".
JPMorgan has until 2019 to reach the new buffer and it should be able to avoid the embarrassment of raising equity in the market. The bank makes about $20 billion in net income every year and could retain earnings to meet the new requirements. Shares in JPMorgan fell a modest 0.35 per cent on Tuesday and a further 0.6 per cent after hours to $62.10.
The target is also approximate and could change — reducing or increasing the capital levels required for each bank.
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Still, it is likely to be a significant and unexpected dampener on earnings for JPMorgan over several quarters. The bank, run by chief executive Jamie Dimon, is likely to have a higher capital requirement than any large US peer, making it work harder for the same returns.
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"While we're still reviewing the Fed's proposal, we are well capitalized and intend to meet their requirements and time frames while continuing to deliver strong returns for our shareholders," said JPMorgan in a statement.
The Fed board voted to approve the proposal, which is subject to public consultation before it is finalized.
One new feature of the rules is an incentive to rely less on short-term wholesale funding — such as the repurchase market where banks exchange securities for cash — which the international Basel Committee did not take into account for its surcharge rules.
Investment banks such as Goldman and Morgan Stanley use more short-term wholesale funding, which the Fed says is too vulnerable to being choked off during a crisis. JPMorgan, Citi and BofA, which are a mix of investment and commercial banks, also use a large amount of wholesale funding but they can also draw on retail deposits.
Fed governor Dan Tarullo has repeatedly said those banks were the most vulnerable to runs in a crisis, and he has suggested they could shrink in size if they wanted to reduce their capital burdens.
"Reliance on short-term wholesale funding is among the more important determinants of the potential impact of the distress or failure of a systemically important financial firm on the broader financial system," Mr Tarullo said.
Wall Street lobbied the Fed heavily, arguing that regulators should consider the different business models of the banks and potential damage to markets. Banks have also argued that tougher U.S. rules will put them at a disadvantage to foreign competitors.