No, the rules are prudent and won't put the U.S. at a disadvantage
These days, big banks have a lot to complain about. They've got hundreds of new rules to deal with, thanks to last year's Dodd-Frank regulation bill. They're also being sued by dozens of investors over mortgages. But today, JPMorgan CEO Jamie Dimon made news whining about the new Basel III capital rules that global regulators seek to impose on his and other big banks. He calls the rules "anti-American." Is he right?
Tom Braithwaite and Patrick Jenkins of the Financial Times break the news. Here's the money quote:
"I'm very close to thinking the United States shouldn't be in Basel any more. I would not have agreed to rules that are blatantly anti-American," he said. "Our regulators should go there and say: 'If it's not in the interests of the United States, we're not doing it'."
In particular, Dimon is concerned about two things.
First, the rules impose higher capital requirements on very large banks. The end in mind here is to reduce systemic risk in the global financial system. The idea is that additional capital cushion should be put in place at large institutions to reduce the likelihood that a market shock could create a financial crisis due to several of giant banks quickly burn through a too-thin capital cushion. Regulators broadly agree that if banks had additional capital in 2008, then the crisis would not have been as severe.
Second, the new Basel III rules provide covered bonds -- securities used to finance mortgages that are popular in Europe -- preferential treatment over U.S. mortgage-backed securities.
Limiting Profits Isn't the Same as Limiting Growth
Dimon may appear to be sort of trivially correct: if the biggest banks face higher capital requirements, then they will necessarily see their profits decline. The U.S. has several banks that will easily be among those facing the strictest capital requirements, which will be between 1% and 2.5% higher than those smaller banks face.
But here's the thing: limiting the profits of a couple of firms isn't the same as limiting the growth of a nation's entire industry. Currently, the sizes of these large banks provide significant advantages over smaller banks. First, big banks enjoy lower relative costs. For example, a new regulatory burden that costs each bank the same amount of money to absorb will reduce a big bank's revenue by a much smaller percentage. Second, many in the market still view very large institutions as too-big-to-fail and subject to government support in a pinch. That provides them with lower financing costs than smaller banks. In a way, these new capital requirements will help to level the playing field.
So if you believe that stronger competition leads to higher long-term growth (and I do), then forcing giant banks to face higher capital requirements would actually boost growth -- not restrain it. The fact that big banks' size provides them a competitive advantage over smaller banks in the U.S. might actually result in lower growth than a more competitive landscape could produce.