JPMorgan Defends Big Banks' Lending Levels

JPMorgan Chase (JPM) is standing up for megabanks against growing criticism and calls for their breakup.

In a paper due to be released Tuesday, a JPMorgan analyst rebuts the charge that big banks tightened up their lending too much after the financial crisis.

It's an accusation made this month by the Federal Reserve Bank of Dallas, whose president has called for the big banks to be broken up.  A recent paper from the Dallas Fed says the too-big-to-fail banks "inhibited a recovery by tightening credit standards and limiting loans" after the crisis.

But JPMorgan says that big banks have been doing their part, and then some. Large banks lend more, relative to their size, than smaller banks do, JPMorgan Chase Asset Management global head of investment strategy Michael Cembalest argues.  Large banks "have generally been providing more credit relative to their ability to do so" than small and mid-sized banks, particularly for business lending, Cembalest writes. 

Cembalest's paper analyzes banks' "credit-to-capital ratio," which compares Tier 1 capital level with the credit a bank extends.  The paper defines "credit" to include categories of funding community banks rarely engage in: credit originations, including municipal bond originations, and the sale and securitization of residential loans, along with traditional bank loans.

"If you really want to see the capital banks provide, you've got to widen your periscope a little," Cembalest said in an interview Friday. "The point of this is to simply ask, how have different-sized banks been doing, based on their punching weight?"

Traditional lending is an increasingly small portion of the credit banks provide, Cembalest says in the report. The study shows that there are $5.3 trillion in outstanding corporate loans, compared to $0.6 trillion in loans from depository institutions. 

JPMorgan cites a 2011 paper from the San Francisco Fed that estimates that large companies obtain around 75% of their credit from capital markets, rather than from traditional loans underwritten and held by banks. 

Cembalest's paper argues that making the financial system less top-heavy may have the side-effect of tightening credit markets, especially during economic downturns.  A financial system containing a mix of small, medium and large banks "seems better suited to provide the credit required by businesses, consumers and municipalities as the US economy recovers," he writes.

"This diversity of size, if not altered substantially by other capital or regulatory issues, should continue to translate into greater access to credit and lower costs of credit for borrowers, which in turn would help increase disposable household and corporate income," says the paper.