The Last Refuge of a Scoundrel

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Jamie Dimon, CEO of JPMorgan Chase, says that new capital adequacy rules are “anti-American”:

The Basel III capital rules are designed to make the financial system safer by making banks build up risk-absorbent “core tier one” capital to at least 7 per cent of risk-weighted assets. The biggest, including JPMorgan, have to reach 9.5 per cent.

“I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.”

He objected to both the additional buffer of 2.5 per cent and the way capital is calculated. Mortgage-servicing rights, a US market feature which takes cashflow from homeowners paying mortgages, are strictly limited in counting towards tier one capital. Mr Dimon also criticised global liquidity rules, arguing that regulations that viewed covered bonds – a European market feature – as highly liquid but discounted government-backed mortgage-backed securities in the US were unfair and that other details hit investment banking activity core to US banks hardest.

Dimon is getting a lot of grief over this, and rightfully so. Still, I think the right lens to look at this isn’t really Dimon-centric, tempting though that is. The truth is that all international financial negotiations, and Basel negotiations most famously, are always endlessly bogged down by parochial minutiae. Every country has a slightly different economy that depends on slightly different things. For example, here’s a Wall Street Journal report on the Basel negotiations a year ago:

The French are demanding changes that would allow their three largest banks — Societe Generale SA, Credit Agricole SA and BNP Paribas SA — to continue owning insurance subsidiaries without facing steep penalties. The Germans and French want banks’ minority investments in other institutions to count toward capital standards. The Japanese have raised concerns about no longer counting deferred tax assets as capital. U.S. officials want banks, such as Bank of America Corp. and J.P. Morgan Chase & Co., to continue to be allowed to count mortgage-securitization rights as capital.

This stuff goes on endlessly because every country has a banking sector that specializes in certain things and not in others, and a business sector that relies on financing in one form but not another. When the dust settles, every country usually loses out on a few of its sacred cows. In our case, it was treatment of mortgage-backed securities. German banks got their way on covered bonds but are still upset over treatment of silent participations. French banks that rode out the financial crisis without problems are unhappy about getting stuck with the same rules as banks that didn’t. And of course, European banks in general are less well capitalized than American banks and are likely to have more problems with Basel’s core capital standards than ours.

It’s possible that the U.S., on net, didn’t do as well as some other countries, but I doubt it. More likely, U.S. negotiators, for obvious reasons, wanted tough capital standards, wanted tough liquidity standards, wanted to rein in the use of mortgage-backed securities, and simply didn’t consider any of them an America-vs.-the-world issue. But then again, neither does Jamie Dimon. He considers it a JPMorgan-vs.-other-banks kind of issue — as well he should. His newfound sense of financial patriotism should be taken with a large shaker of salt.

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