When will big banks grow up?

October 18, 2011, 9:00 AM UTC

JPMorgan Chase's Jamie Dimon and Goldman Sachs' Lloyd Blankfein

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE – Make no mistake, big banks will not be submitting to new regulations without a fight.

A few weeks ago, JPMorgan (JPM) CEO Jamie Dimon reportedly got so worked up during an exchange with the governor of the Bank of Canada that Goldman Sachs (GS) CEO Lloyd Blankfein felt the need to send an email apology to the regulator after the group meeting. (Dimon later acknowledged the intensity with which he expressed his views).

Bankers at the largest institutions may think bullying regulators will stop new capital requirements for the largest institutions — but that tactic just may not work this time.

Perhaps that’s because regulators aren’t alone in their concerns. Public opinion is not in favor of letting the largest banks off the hook. Many in the business community (including executives in other industries) are skeptical that, if left to their own devices, the largest banks that relied on the Fed window and bailouts will be able to avoid a repeat of the financial meltdown. And on Saturday, finance ministers from the G20 offered their support for a requirement that big banks be subject to an additional capital surcharge, on top of the capital requirements all international banks will be required to follow.

While some of the arguments bank executives are making are fair (for example, Citigroup (C) CEO Vikram Pandit called new capital proposals a blunt instrument), other statements just reinforce the need for additional bank oversight.

For example, Pandit says new capital requirements would simply encourage unregulated parts of the system to flourish. But if bankers behaved responsibly, they’d disclose where those issues would come from and help regulators close the gaps, something Daniel Indiviglio at The Atlantic says regulators could easily do.

In arguing against new rules, Dimon says large banks are necessary to support the needs of the very largest corporations: scale is essential. If this is true, bankers should be charging the very largest corporations for the luxury that their scale offers and for the increased risk it poses to other customers and stakeholders.

While it is possible to make rational arguments over the basis of capital for particular asset classes, those issues have existed since the first accord in 1988. Bankers had no problems with inexactitude when it moved in their favor. Rather than step up their own risk management over the past two decades, too many bankers used weak regulatory capital guidelines as the way to measure risk. Regulatory regimes always involve compromise — and the bankers know this.

The proposed capital surcharge and new FDIC fee assessments on the largest institutions with high risk concentrations, however, are a different matter. They are simple recognition of the market-based economics that exist for regulators and taxpayers.

By way of their scale, the same big banks that have access to the largest customers (unavailable to other, smaller banks) are also the banks that pose the greatest risk to the financial system if they fail. Because of their scope and sophistication, they demand extraordinary attention from regulators. By requiring so much attention from regulators, other weaknesses in the financial system go unaddressed, a cost everyone in the system pays for eventually. For these reasons, big banks should incur certain economic charges to discourage size for its own sake and activities that continue to require so many regulatory enforcers on the beat.

The requirements are economic recognition of the cleanup taxpayers will incur whether or not these institutions are allowed to fail. In this sense, too big to fail doesn’t matter.

Large bank customers who make such scale necessary should pay for the privilege. It’s simple economics. Yes, bankers may need to rethink their business models, but this is a good thing.

Post crisis, the largest banks have done less than one would hope to demonstrate meaningful change. The foreclosure issues that continue unabated are an example of the larger banks’ failure to address issues unless they are forced to do so. The fact that banks are just waiting around until they are required to develop living wills is another example.

Instead of waiting to be told, banks could have promoted calmer markets and greater trust by producing robust living wills on their own and providing transparency to their contents as much as feasible. A third example is the failure to take seriously the compensation and risk issues demonstrated by the crisis.

Instead of railing at the new rules, the largest banks should become model citizens and step away from casino-like trading. Then, it might be possible for them to have a rational conversation with regulators. If the largest banks want no action from regulators in the future, the best place to start is by showing regulators that they don’t require their attention at all.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (


), a board advisory firm.