Interesting to see JP Morgan Chase chairman and CEO Jamie Dimon resume his mission to curb banking over-regulation in recent days. At a speech at an American Bankers Association event widely reported by media, he once again spoke of the need to push back against over-bearing and stifling regulation that in his view is no longer fit for purpose.
Talking of Basel III finalization, the final leg of the post-Global Financial Crisis (GFC) global capital framework (referred to as the Basel III endgame), Dimon was reported as saying that the additional capital charge for global systemically important banks was one of the stupidest elements of the framework, that the operational risk calculations were ridiculous and that there were inconsistencies in the liquidity coverage ratio.
I don’t know about some of the language he apparently used (“We don't want to get involved in litigation just to make a point, but if you're in a knife fight, you better bring a knife and that's where we are.”). It certainly suggests he means business but does he have a point?
Dimon had already written at some length on this topic in the bank’s 2023 annual report published in April 2024. Referring to the post-GFC Dodd-Frank Wall Street Reform and Consumer Protection Act that brought in a much more stringent set of US banking regulations, he wrote: “It’s time to take a serious, hard, honest look at what has been done and what can be improved.” Of the multiple regulatory agencies passing rules, he wrote: “It would probably be an understatement to say that some [of the rules] are duplicative, inconsistent, procyclical, contradictory, extremely costly and unnecessarily painful for both banks and regulators … with unintended consequences that are not desirable and have negative impacts.”
In Europe, the campaign to have regulators dial back on what is now seen as over-regulation is also gaining pace. Especially now that the banking sector as a whole has got itself onto a better footing since the global financial crisis of 2007-2008 that set the pendulum of re-regulation a-swinging.
In the European Union, the concerted push by market participants and other stakeholders to revitalize securitization as a vital component of completing the capital markets union is predicated on a firmly-held view that current regulations are way too punitive, having been written to take account of the status quo of a very different era (post-GFC) and of developments in another part of the world (the US, where the securitization default rate was a multiple of defaults in Europe). The drivers for action today are wholly different hence call for a wholly different regulatory framework, those pushing for a relaxation say.
More generally, in an environment where private credit, other forms of non-bank finance, and fintech have grown meteorically but are not subject to similarly robust regulatory oversight as the banking sector, it’s not difficult to see why the campaign is gathering pace. But by the same token, it’s also easy to see a real conundrum, in that Dimon and the broader banking lobby would ask for lighter-touch regulation, wouldn’t they? I mean, bankers calling for less stringent rules? It’s a bit too obvious.
So, to the question of whether it’s time to say enough is enough, it’s a tough call. Sure, the banking sector in the US, Europe and other regions of the world is certainly better capitalised, has more sensible liquidity and leverage rules, and is starting to earn more than its cost of capital now that the era of zero and negative interest rates has come to an end, major central banks have switched into quantitative tightening, and higher rates have given banks a shot of generating reasonable net interest margins.
But why is the banking sector on a better footing? Because regulators got a grip in the post-GFC period and sought to stamp out the dreadful governance and the rampant risk culture that had enveloped the banks. And because the supervisory oversight that evolved alongside the re-regulatory swing, while far from perfect, has generally been more robust.
Is there ever a good time for regulators to take their foot off the pedal? For those pointing to the debacles at Credit Suisse, Silicon Valley Bank and other US regionals just last year, which had people deeply anxious about another global banking crisis, the answer is a resounding no. Even if Dimon’s point is not so much about regulation per se but about poorly conceived regulation that serves little purpose but which adds cost and complexity, I’m not sure that fundamentally changes the nature of the game for those seeking to maintain global financial stability in very unstable times.
