Originally published in the Financial Times
Let’s agree that a lot of bad stuff happened along the way to the 2008 financial meltdown and that a good portion of the responsibility can justifiably be laid at the feet of the Wall Street community. Whether or not laws were broken, the lack of discipline and inadequate controls around many lending and risk taking practices certainly merit some version of the vigorous rethink of the regulatory apparatus that is now in process.
That said, it is still possible to feel Jamie Dimon’s pain as he vented his frustration over new regulatory proposals at Mark Carney, Bank of Canada governor, while perhaps not always loving his tonality. As the chief executive of JPMorgan Chase (full disclosure: also a friend of mine), Mr Dimon presides over a bank that emerged the least scathed from the
meltdown and arguably conducted itself more responsibly than most of its peers.
For its trouble, JPMorgan is now at the short end of the stick: potentially penalised for being American (because of the tougher US response to the crisis, at least so far) and penalised again by elements of the proposed Basel III rules, such as the potential requirement for an extra capital charge as a financial institution considered too big to fail.
That may be unfair but it’s not totally surprising. As New York was at the epicentre of the debacle, it’s only logical that Washington would take a stronger hand in reworking the rules and the oversight. And within the US political process, overreaction can easily occur, as it did with the Sarbanes-Oxley Act, which was intended to reform corporate governance and improve corporate accountability following a raft of fraud cases a decade ago.
Meanwhile, with no reliable mechanism yet in place to address the problem of ‘too big to fail’, a safety net of additional capital under these immense institutions is at least a political necessity, and arguably an economic necessity. In the fullness of time, Mr Dimon may well be proved right that such prudence is excessive, and a serious constraint on lending, not to mention shareholder returns. But in the meantime, bankers must appreciate that the understandable rage of the citizenry dictates nothing less.
Implicit in Mr Dimon’s commentary is the indisputably valid grievance that notwithstanding the broad recognition that financial markets around the world are interconnected and interdependent, we still lack a global supervisory framework. Just as US regulators may pursue toughness, so may – as many American bankers allege – some European supervisors choose a lighter touch.
A further conundrum is that the financial system consists of far more than just traditional lenders. Within the shadow banking system, hedge funds and other quasi-unregulated pools of capital can provide much of the same kinds of financing. The tougher the capital requirements and other strictures become on banks, the more business will flow to these dark pools, creating another set of risks to the financial system.
For the moment, the practical impact of Mr Dimon’s grievances may well be limited to his firm’s share price. Loan demand remains weak, and JPMorgan boasts a formidable capital base. With Europe deep in crisis, competition from continental banks will be muted for some time. And Basel III is years from taking effect.
What is urgently needed – but sadly nowhere on the horizon – is a comprehensive, worldwide system of regulation and supervision for a financial system that constitutes a sort of global circulatory system. While Mr Dimon may not agree with all the rules that would emerge from such an arrangement, at least all lenders would be competing on a level playing field.