JPMorgan Chase may need another $20 billion after Fed sets new rule
JPMorgan Chase & Co. needs to find more than $20 billion to beef up its capital reserves by 2019 to meet new regulations issued by the Federal Reserve.
The New York-based bank already faces the highest capital surcharge under international requirements, and that’s getting even more stringent after the Fed set out a plan Tuesday to increase surcharges on the eight largest U.S. banks.
The additional buffer is intended both to reduce the risk of a bank failure, and the need for publicly-funded bailouts if a major bank does fail. The new range of surcharges reflects the authorities’ desire to make sure that banks that are “systemically important” are even safer than smaller ones, and thus end the concept of “Too Big To Fail”.
The Fed didn’t outline specific requirements for each bank, but said it would raise its capital requirements anywhere from 1% to 4.5% of risk-adjusted assets. In order to meet the new demands, the eight U.S. banks would need an additional $21 billion, according to the Fed.
According to comments by the central bank’s Vice Chairman Stanley Fischer, JPMorgan (JPM) will likely be the hardest hit by these new requirements. It is “the firm that is actually going to have to come up with more capital,” said Fischer. He added that one bank would need another $22 billion in reserves, a “pretty impressive shortfall.”
JPMorgan has about $163 billion in top-quality capital, or 10.1% of risk-weighted assets, as of the end of the third quarter. The levels meet the standard outlined by the Basel Committee on Banking Supervision. In order to meet the new 11.5% ratio indicated by the Fed for the highest-risk group, the bank would need more than $20 billion in additional capital.
While the bank is still reviewing the Fed’s proposal, JPMorgan is “well capitalized and intend to meet their requirements and time frames while continuing to deliver strong returns for our shareholders,” according to a company spokesperson.
On current trends, the bank should easily be able to reach the new threshold just by retaining earnings. It has been churning out over $5 billion a quarter in net profit this year as the economy returns to health.
Marianne Lake, JPMorgan’s chief financial officer, addressed the Fed’s updated regulation at an investor conference in New York Wednesday. She said the bank wouldn’t have to make “meaningful change” to its corporate and investment bank and will be able maintain its payout to investors while it meets the new requirements.
The Fed set a 2019 target for compliance. The committee said that “almost all” of the banks already meet the new standard, and all the companies are on the right track to succeed by the end of the 2016 to 2019 transition period.
The other banks that are subject to the new requirement are Citigroup (C), Morgan Stanley (MS), Bank of New York Mellon (BK), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS) and State Street (STT).