Jamie Dimon Shares Thoughts on Basel Endgame
He dislikes it. Also: major questions, leveraged lending, and the OCC's Chief Financial Technology Officer
Basel Endgame
When the federal banking regulators in late July released their proposals to implement (in a way) the final Basel III capital standards in the United States, they provided estimated impact assessments. They did the same for the long-term debt proposals for non-U.S. GSIBs released last month.1
In addition to acknowledging various caveats and uncertainties with the estimates, the agencies also noted that impacts were expected to “vary meaningfully” across firms depending on each firm’s activities and risk profile.
The July and August release of the proposals came after most large U.S.-based firms announced second quarter results and held earnings call with analysts. As a result there has not yet been much (public) quantification of estimated impacts from banking organizations themselves. That is expected to change over the coming weeks as banks attend various investor conferences and, in mid-October, provide updates in connection with the release of third quarter earnings.
Today, for example, a number of banks presented at the Barclays Global Financial Services Conference. This post looks at what they had to say about the Basel Endgame proposal and certain other regulatory matters while they were there.2
JPMorgan Chase
In remarks this morning at the conference BNY Mellon’s CFO Dermot McDonogh said that while his own comments about the proposals (discussed below) would be limited, he thought today was “going to be an interesting conference” because “you have a lot of people here who have a lot of passion for the 1,100 pages and will be telling you what they think.”
McDonogh did not name anyone specifically, but one individual frequently passionate about the capital rules is JPM CEO Jamie Dimon, and passionate is one word you could use to describe Dimon’s comments today. Some highlights:3
“[W]e would have to hold 30% more capital than a European bank. Is that what they wanted? Is that good long term? Why? Didn't we say we have international standards? What was the ---damn point of Basel in the first place?”
“I've always thought G-SIFI is an asinine calculation. Operational risk is even more asinine.”
“Operational risk -- are all revenues equally bad, really? Like, honestly, I look who did that, what person in what ivory tower thinks that that is a rational thing to do.”
“I would prefer more transparency … [on] the process they went through. Did all the governors have a point of view? I'd like to know what the other governors think.”
“We used to have real conversations with regulators. There is virtually none anymore. Of course we simply have to take it because they are judge, jury and hangman, and that is what it is.”
“All I want is fairness, transparency, openness and they should do what’s right for the United States of America.”
“Basically what we think today is 30% more RWA [for JPM] … and it's 25% more capital.”
“Do you think the NPRs going to make a ---- of difference? It's my academics argue with their academics, then they’re going to do what they want anyway. That's all that's going to happen.”
Unless, that is, “some other Fed governors or other people decide to get deeply involved and try to do what's right and fair and they think about what's good for the country, not just can they stop themselves ever from being blamed for a bank failure.”
Dimon made clear, however, as he has before, that he believes JPM will be able to manage through all this unpleasantness.
BNY Mellon
As noted above, his comments were not quite so extensive, and certainly not so fiery, but BNY Mellon CFO McDonogh did share the following:
The company expects RWAs to increase “up 5% to 10%,” slightly better than consensus.
Overall things will be manageable, with the biggest impact for BNY Mellon (as expected) coming from the operational risk changes.
“I sit here and kind of see BNY Mellon having spent north of $1 billion over the last few years and improving the resiliency of the enterprise and reducing operational risk”
“But I think the message I'd like to leave everybody with here is, it's manageable for us…”
Truist
In prepared slides, Truist stated that it expects “a high single digit % increase to RWA.” The same slides say that Truist expects to manage RWA by focusing on core clients, while de-emphasizing businesses with lower profitability.
That said, during his appearance Truist’s CEO Bill Rogers and CFO Mike Maguire made clear today that the company is “not on a diet” when it comes to RWA, but rather the bank is “managing our RWA for its maximum effectiveness and maximum return.”
Citizens Financial Group
In prepared slides, CFG estimated today that it would see a 4% increase in RWA under the Basel Endgame proposal, with the majority of the increase driven by operational risk RWA, “partially offset by lower RWA for credit risk (primarily CRE, retail and off-balance sheet commercial commitments).”
On the agencies’ long-term debt proposal, Citizens estimates it needs an incremental $4.3 billion of eligible LTD to achieve the 6% of RWA minimum set out in the proposal. Citizens expects to meet this requirement through “measured and opportunistic” issuances over the multi-year phase in period.
Finally, and maybe most interestingly given that there is no proposal yet, Citizens included a slide directly addressing the potential for new liquidity requirements for firms with between $100 billion and $250 billion in total assets. Citizens says it is, of course, still “[a]waiting clarity on new rules for Category IV banks regarding liquidity coverage ratio requirements” but notes that even today the company would be compliant with the reduced LCR applicable to Category III firms, and is very close to being compliant with the full LCR, should that be required.
Huntington
Zach Wasserman, CEO of Huntington Financial, said the company is “still assessing” the potential impacts of all the recent regulatory proposals, but “net-net” expects a “mid-single digits” increase in RWAs. Also:
“On TLAC, we're pleased to see the proposed rule would grandfather in bank level issued unsecured debt for the initial period of implementation, which would reduce the overall new issuance load”
“For Huntington, liquidity is exceptionally strong … and we already meet a fully unmodified LCR coverage ratio, irrespective of any tailoring.”
“But certainly, there's a number of capabilities around liquidity management that are in process, and that's part of the program.”
Also This Week
In addition to further presentations at the Barclays conference not covered in this post, this week will also feature an HFSC subcommittee hearing on the Basel proposal. No indication as yet if any of the panelists will express their views as colorfully as Mr. Dimon.
Elsewhere in recent regulatory developments
The rest of this post offers briefer thoughts on a few other regulatory developments not yet discussed on this blog, some of which are more current than others.
Major Questions
Last Friday afternoon a federal judge in the United States District Court for the Eastern District of Texas ruled that the CFPB’s 2022 updates to its exam manual exceeded the agency’s authority.
Plaintiffs seek relief from the CFPB’s March 2022 update to the UDAAP portion of its Supervision and Examination Manual, which directs examiners to use the agency’s UDAAP authority to access companies’ data, algorithms, operations, premises, and personnel for evidence of “discrimination,” including “disproportionately adverse impacts on a discriminatory basis,” or evidence of insufficient internal monitoring for those outcomes. For the reasons given above, the court holds that the CFPB’s adoption of that position in the March 2022 manual update is beyond the agency’s constitutional authority based on an Appropriations Clause violation and beyond the agency’s statutory authority to regulate “unfair” acts or practices under the Dodd–Frank Act.
On the statutory question,4 the court concluded that the major questions doctrine means that, before the CFPB could revise its manual in this way, Congress needed to confer (and had not in fact conferred) upon the CFPB the authority to do so in exceedingly clear language.
Given the statutory text, structure, and history just discussed, the Dodd–Frank Act’s language authorizing the CFPB to regulate unfair acts or practices is not the sort of “exceedingly clear language” that the major-questions doctrine demands before finding a conferral of agency authority to regulate discrimination across the financial-services industry, independently of the CFPB’s separately conferred antidiscrimination power in specific areas. For that reason, the court grants summary judgment to plaintiffs on their statutory-authority claim.
The court based this conclusion, in part, on what it viewed as the major economic impact of the manual change, which it characterized as follows:
The choice whether the CFPB has authority to police the financial-services industry for discrimination against any group that the agency deems protected, or for lack of introspection about statistical disparities concerning any such group, is a question of major economic and political significance. As to economic impact, such an authority would have large implications for the financial-services industry. That is shown by the millions of dollars per year spent by companies attempting to comply with the UDAAP rule at issue here.
I am not convinced the analysis in the opinion is correct, including because it seems to set a fairly low bar for concluding that an agency’s action is economically significant.
In any case, for a victory lap/preview of what might be coming next, see this detailed post from Ballard Spahr.
Elsewhere on the subject of major questions, and perhaps reflecting a view that is too lax in the other direction, Capitol Account on Friday had an good interview with Harvard’s John Coates. Among other notable professional achievements, Professor Coates during the first year of Gary Gensler’s time in charge of the SEC spent time as the agency’s General Counsel and, prior to that, the Acting Director of the Division of Corporation Finance.
In the interview Professor Coates observed:
One in eight, probably one in seven now, U.S. workers work for a private equity firm, one way or the other – even if they don't know that. And it's still going up. Put a little differently, 20 percent of the entire U.S. economy, more or less, is now within private equity…It's the biggest growing financial sector, and definitely growing much faster than, for example, banks or insurance.
Naturally, later in the interview the discussion turned to the SEC’s recently finalized changes to its private funds rule. For these changes at least, Professor Coates believes the major questions doctrine should not apply:
JC: That's a big part of why I think the private fund industry sued on this rule. I don't think they would've sued two years ago. They would've thought the odds of winning were pretty low. But now you've got this roll of the dice – maybe it's a major question.
CA: Is it?
JC: I don't think it's a major question. To be clear, as important as I think the private equity fund world is, these particular disclosures are not directly significant to the overall economy.
The Leveraged Lending Guidance Helps Save Syndicated Loans
A few weeks ago the Second Circuit held that syndicated loans are not securities under the federal securities laws. Matt Levine’s conclusion on this is basically where I come out,5 and overall I think it is a good thing that the Federal Reserve and Treasury reportedly were able to convince SEC Chair Gensler not to do something rash.
That said, there is one part of the Second Circuit’s decision I have not yet seen discussed in detail that reads a little funny to those with a background in recent fights over the role of guidance in bank regulation.
When deciding whether an instrument is a “note”(and thus subject to the federal securities laws) courts under a case called Reves are supposed to analyze the instrument under a four-factor test, and then balance the four factors in some loosely defined way.6 As relevant here, the fourth Reves factor is whether the instrument in question is subject to “another regulatory scheme [that] significantly reduces the risk of the instrument.”
The Second Circuit in this case said that yes, when banks make loans like the ones at issue here, they are subject to “specific policy guidelines” set out by the federal banking regulators. The court cited the 2013 Interagency Guidance on Leveraged Lending.7
This 2013 leverage lending guidance was famously controversial, and was a key factor in the agencies a few years later issuing a statement (and then, a few years after that, adopting a formal rule) on the role of supervisory guidance. The statement and formal rule reiterate that supervisory guidance like the 2013 leveraged lending guidance “does not have the force of law and cannot give rise to binding, enforceable legal obligations.”
The Second Circuit did not address this history, but it did address a different argument made by the plaintiffs as to why guidance like this was not the sort of risk-reducing scheme the court in Reves had mind.
Plaintiff contends that the Bank Regulators’ guidance … “merely addresses risk management controls to ensure sound banking practices and minimize risks to banks” and “does not address risks to investors.”
Not so, the court says. Even though the leveraged lending guidance is aimed at minimizing risk to banks, the role of bank regulator supervisory guidance as a general matter is to provide examples of practices regulators consider “consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers.”8
The court based this conclusion on the 2021 rule on the role of supervisory guidance linked to above, which says:
Supervisory guidance often provides examples of practices that the Board generally considers consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers.
So the court seems to be saying that, even though this specific guidance is non-binding, and even though it is not primarily geared toward investor protection, the fact that the banking regulators have said that the guidance they issue, as a general matter, aims to protect consumers, means their guidance is sufficient here to be a risk-reducing scheme under Reves.
Again, I think the overall conclusion reached by the court in keeping syndicated loans outside the scope of the federal securities laws is perfectly fine, and there are other compelling reasons why the court approached the analysis of the fourth Reves factor in this way.9 Still, as an academic matter the court’s approach is a little unsatisfying.
The Short Tenure of the OCC’s First Chief Fintech Officer
In 2022 the OCC announced that it intended to establish an Office of Financial Technology, to be headed by a Chief Financial Technology Officer to be named later. The OCC then in March 2023 issued a press release saying that Prashant Bhardwaj had been selected as Deputy Comptroller and Chief Financial Technology Officer, assuming the post on April 10, 2023.
Sometime between April and now,10 Mr. Bhardwaj left the role. The Office of Financial Technology is now led by Miriam Bazan, Acting Chief Innovation Officer.
Jason Mikula’s Fintech Business Weekly dives further into the mystery.
Thanks for reading! Feedback on this post may be emailed to bankregblog@gmail.com
For example, in the context of the joint Basel Endgame proposal, the agencies estimated:
Across all holding companies subject to the proposal, the agencies estimated an overall increase in risk-weighted assets of 20% relative to currently binding measures of RWA. On a more granular level:
U.S. GSIBs and Category II firms would see an estimated 25% increase in RWAs;
U.S.-based firms in Category III or Category IV would see an estimated 6% increase in RWAs; and
The Category III or Category IV U.S. intermediate holding companies of foreign banking organizations would see an estimated 25% increase in RWAs.
As a result of the increases in RWAs described above, across all holding companies subject to the proposal, the agencies estimated an overall increase in binding CET 1 capital requirements of around 16%. On a more granular level:
U.S. GSIBs and Category II firms would see an estimated 19% increase in binding CET 1 requirements;
U.S.-based firms in Category III or Category IV would see an estimated 6% increase in binding CET 1 requirements; and
The Category III or Category IV U.S. intermediate holding companies of foreign banking organizations would see an estimated 14% increase in binding CET 1 requirements.
The relevant regulator(s) also provided separate impact estimates in connection with the proposed GSIB surcharge revisions and proposed long-term debt rule.
Unless otherwise noted, all quotes come via transcripts available from MarketScreener at this link.
Notwithstanding footnote 2, the rush transcript was pretty terrible, so these quotes come from me listening to the recording myself and any errors are mine alone. The recording is available here.
The plaintiffs (various trade associations) also brought a constitutional claim based on the CFPB’s funding structure. The court ruled against the CFPB on that point as well, as it was bound to by the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. CFPB, a decision that will be examined by the Supreme Court next month.
Levine: “It doesn’t make a ton of sense that bonds are securities and loans aren’t, but it doesn’t really cause much trouble either, so the courts might as well leave it alone.”
Unlike the more famous Howey test, the Reves test does not require all four factors to be met in order for something to be deemed to be a security.
The other example cited by the court is the portion of the OCC Comptroller’s Handbook addressing leveraged lending.
Emphasis in the opinion.
The Second Circuit in a 1992 case called Banco Espanol already considered and rejected an argument like the one made by the plaintiffs here that guidelines adopted by the federal banking regulators concerning these sorts of loans really don’t do much for investors. The court said the plaintiff had offered “no compelling reason to revisit that decision now.” Nor, as the court politely pointed out, did the SEC. See footnote 117.
An archived version of the OCC’s page from May shows Mr. Bhardwaj listed as heading the office. By mid-July, the OCC’s page had been updated to remove Mr. Bhardwaj and list Ms. Bazan.