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.
Big Banks Always Have a Choice
Dimon also needs to a reminder: big banks have it within their power to sidestep these relatively higher capital requirements. If they wish to instead adopt the lower capital requirements that smaller banks face, then they can take action that would allow them to do so. How? They can break themselves up.
These banks like being so big for a reason. As just explained, their size provides them with a competitive advantage. If Dimon or other big bank CEOs see the new relatively higher capital requirements they face costing more than the additional revenue that their competitive advantage provides, then the logical solution would be to split up their institutions.
This might not seem like a reasonable alternative, but it's precisely what the new capital requirements get at. They are being put in place because these banks are believed to pose a systemic risk. If they are broken up, then that risk would disappear -- and so would the motivation for their relatively higher capital requirements.
Covered Bonds versus Mortgage-Backed Securities
What about covered bonds? Is the U.S. being penalized because they simply finance mortgages differently than Europeans? Yes, but again the reason why makes sense: covered bonds actually happen to be safer than mortgage-backed securities.