JPMorgan Chase executives are warning that regulators' plan to strengthen capital requirements for large banks will make loans more expensive for borrowers and drive more consumers to do business with nonbank lenders, creating potentially adverse outcomes for the broader economy.
The largest U.S. bank by assets told analysts Friday that the $3.9 trillion-asset company may need to hike interest rates on loans and pull back from offering certain products and services, depending on how much capital banks will be required to carry under forthcoming new rules.
The capital increases proposed by regulators are "excessive" and will put pressure on JPMorgan to "increase price" where it can, Chief Financial Officer Jeremy Barnum said during the company's quarterly earnings call. "That is generally a bad thing for the real economy, and how all that plays out in detail across different products and services remains to be seen," he said.
And higher capital requirements for banks open opportunities for nontraditional lenders that don't have to abide by similar capital rules, JPMorgan CEO Jamie Dimon pointed out on the call.
"This is great news for hedge funds, private equity, private credit, Apollo, Blackstone," said Dimon, referring to two of the world's largest asset managers. "They're dancing in the streets."
JPMorgan's caution comes just four days after Federal Reserve Vice Chair for Supervision Michael Barr called for
In the months since the demise of Silicon Valley Bank, Signature Bank and First Republic Bank, which
Barr said the changes could result in a 2% overall average increase in capital for banks, which would have several years to build up the required amount of equity to meet the new rules.
He also said stronger requirements are meant to align the United States with the Basel III endgame guidelines, which will bring more standardized capital rules to big banks. But banking groups and some lawmakers are worried that higher capital requirements will decrease banks' willingness to make loans to individuals and businesses, which could harm the economy.
Industry groups
While there has been previous talk about higher capital requirements, "something's coming down the pike for sure" this time, but it "remains to be seen how onerous [the rules] will be," said James Shanahan, an analyst at Edward Jones who covers North American financial firms.
"You don't want to increase capital requirements for banks so significantly that you're incentivizing mostly commercial, middle-market borrowing customers to pursue lending relationships outside traditional banking channels because that winds up increasing the overall risk to the broader financial stability of the economy," Shanahan said in an interview Friday.
In the meantime, "banks are reluctantly accepting their fate that they will have to absorb higher capital costs going forward," he added.
JPMorgan's Barnum concurred.
"As much as there have been a lot of very detailed rumors out there that might lead you to start to try to do some planning, it does seem like this time it's real," he said.
One area that JPMorgan doesn't anticipate backing away from as a result of higher capital requirements: investments it is making in the company, Barnum added.
"I don't see us sacrificing investments that we see as strategically critical in order to comply with higher capital requirements ahead of the formal timing or whatever," he said. "That would be an unlikely outcome."
JPMorgan reported record revenue of $41.3 billion for the second quarter, boosted by interest rate hikes and the purchase of First Republic. The acquisition contributed $4 billion of revenue, $599 million of expenses and $2.4 billion of net income, Barnum told analysts during the call.
All in all, it resulted in a gain of $2.7 billion for the quarter, he said.
JPMorgan onboarded about 5,100 former First Republic employees on July 2 and the settlement process with the Federal Deposit Insurance Corp. is on schedule, Barnum said.
On the First Republic customer retention side, JPMorgan collected about $6 billion of net deposit inflows between May 1 and the end of June. The systems conversion is set for mid-2024.
