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The Fed Should Heed Dimon’s ‘Bad for America’ Line

Bankers are not known for their modesty. Who could forget Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein saying in 2009 that the firm was doing “God’s work” right after the US’s biggest banks had to be bailed out by the federal government? It didn’t matter that a spokesman for Goldman Sachs said later that Blankfein didn’t mean for his words to be taken seriously; the episode just reinforced the notion that bankers were out of touch with reality. 

Now comes Jamie Dimon, the billionaire chairman and CEO of JPMorgan Chase & Co., who wrote in prepared remarks ahead of congressional hearings this week that higher capital requirements for banks are “bad for America.” Some will no doubt skewer Dimon for seeming to suggest that efforts to make the banking system — the lifeblood of the economy — safer is somehow unpatriotic. And that’s not necessarily a bad thing. Bankers should be regularly reminded of just how close their reckless actions came to causing a financial system collapse back in 2008.

Nevertheless, Dimon’s remarks shouldn’t be dismissed as just hollow words from an entitled banker. The reality is that the banking system today is nothing like its former self. Reforms such as the Volcker Rule, the Dodd-Frank Act and Basel III forced most big banks to cut back on proprietary trading and keep a sizable portion of their reserves in the safest assets.(1)US banks are sitting on surplus liquidity — deposits minus loans — of $6.43 trillion, up from about $250 billion in 2008, according to the Federal Reserve. 

Banks are so flush with money that they have no incentive to attract deposits. They offer rates on two-year certificates of deposit that are, on average, below the yield on US Treasury two-year notes, something that’s rarely ever happened. 

Perhaps the clearest sign that the financial system is relatively safe is that banks are showing little concern about lending to each other at a time when rapidly rising interest rates have roiled markets. A measure of overnight funding costs, a critical gauge of stress in the financial system, stands at about 25 basis points, not too far from the average of 21 basis points seen since the global economy began to recover from the financial crisis. In short, there’s no indication we’re headed for a damaging credit crunch. 

It’s clear the banking system has emerged stronger from the many crises and disruptions of the past decade. Those include the European debt crisis, China’s botched currency devaluation in 2015, the Brexit referendum the following year, the “Volmageddon” episode of February 2018, the Covid-19 pandemic and the collapse of Bill Hwang’s about $35 billion hedge fund Archegos Capital Management. More recently, we’ve seen a meltdown in cryptocurrencies, the highest inflation in 40 years, historic rate increases by the Fed and perhaps the worst bear market in bonds ever. And yet, the banking system is holding up fine, judging by the Fed’s latest, harsher stress tests.

“The continued upward trajectory of regulatory capital requirements on America’s already fortified largest banks, particularly when not reflective of actual risk, is itself becoming a significant economic risk,” Dimon wrote. “This is bad for America, as it handicaps regulated banks at precisely the wrong time, causing them to be capital constrained and reduce growth in areas like lending, as the country enters difficult economic conditions.”

Dimon’s remarks were seemingly in response to a recent speech by Michael Barr, the Fed’s new vice chair for supervision. Barr has said that US officials are reviewing bank capital requirements and are committed to putting in place strictures that align with the global Basel III standards, according to Bloomberg News. Barr has signaled he’s more supportive of tougher restrictions for bigger, systemically important lenders than for smaller institutions. “As firms increase in systemic importance, the social cost of their failure grows,” Barr said in a Sept. 7 speech, according to Bloomberg News. “Regulations should be designed to require firms to internalize the costs that their potential failure would impose on the broader financial system and thus on businesses and households.”

To be clear, this is no time to become complacent about the banking system. The economy will need healthy banks to help it recover from what’s likely to be a protracted period of slow growth. Dimon, who has a history of declaring efforts to rein in banks as bad for America, is right to point out that excessive capital requirements may hinder banks from doing their jobs -- extending credit when it’s most needed. Still, a little more humility would be nice. 

More from Bloomberg Opinion:

• A Bigger Bonus for Bankers? UK Plays With Fire: Marcus Ashworth

• Sorry, Bankers, You’ll Never Have an Easy Life: Paul J. Davies

• Real Stress Hurts Bank Buybacks More Than a Test: Paul J. Davies`

(1) True, much of those safe assets - some $4.55 trillion - are in US Treasury securities, which are currently losing value.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.

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