Banks: We'll make you pay for regulation

The banks are busy calculating how much financial regulation will cost them -- I mean, you. Today, JP Morgan came out with a 184-page report that claims proposed changes to regulation will lead to a 33% increase in the price of all banking services.

The report says return on equity (ROE) for global banks would fall from 13.3% to 5.4% if all the US and European regulation proposals become law. More from the Financial Times:

The issue then is the extent to which banks can pass on the `cost' of the regulatory hit to their customers. By JPM's estimates, pricing on financial products would have to go up by 33 per cent for the bank sector ROE to get back to 13.3 per cent.

Do banks need a 13.3% return on equity for shareholders? Is that some kind of magic number? Well, no -- but I'm assuming that figure comes from looking back at ROE during the banks' healthier days. See bank ROE for this decade by quarter. Between 2000 and 2007, ROE consistently ranged between 12-15%. Since late 2007, commercial bank ROEs have ranged from -9% at the depth of the financial crisis to about 7%.

I'm sure the banks would like to get back to the good ole' days. We'll have more on ROE tonight on Marketplace.

If the ROE doesn't scare Congress, JP Morgan hopes this will:

"The cumulative impact of all the proposed regulation suggests that there is a real risk that we may move from a system that was under regulated to one that is over regulated and that could cause a significant increase in lending costs and a negative impact on the economy."

In other words: Stop what you're doing at once. You will destroy the global economy. Hey, we should know. We have a particular talent in doing just that.

But on one of the 184 pages of this report, JP Morgan says no more Too Big To Fail:

"We believe big banks should be allowed to fail. We think stability in the financial system should be addressed by ensuring deposit insurance systems are stable and well funded, and by tackling directly the risks presented by the interconnectivity and potential contagion of the modern global banking system."

Sounds like a call for regulation to me.

Log in to post16 Comments


The banks seem to think they are "entitled" to a 13.3% ROE. Many industries in this country are heavily regulated and still manage to record a positive ROE. What's wrong with a 5.5% ROE? Wouldn't we all like to get a 5% return on our equity? I know I would!

The banks are acting like spoiled children who have been bailed out one too many times and now expect more and more. Time to cut these kids loose!

The reaction of well-heeled, inefficient industries is always the same. When threatened with their rightful comeuppence, they come up with a self-serving study aimed at creating fear in the hearts of the public. More than that, this transparent attempt to foist one over on the public is not lost on the politicians they've already bought and paid for. If any meaningful reform ever makes it out of committee, you can count on these same politicians to reference this pathetic piece of "research." How disgusting and predictable.

Guess what? I'm neither fooled nor afraid. How 'bout that JP Morgan?

You are ignoring that regulations <i>caused</i> the financial problems. Consider these regulations:

1. The Fed
4. Freddie & Fannie
5. Govt influence on rating agencies
6. Micromanagement of every aspect of starting & running a bank
7. Policies that provide carrots and sticks to lenders to push them into risky lending (e.g. the CRA)

Ignoring these regulations is like putting your nose on the TV and saying that the currently playing TV show is "a red pixel".

Good point, Rob. Ineffective, unenforced regulation is just as bad as no regulation. And so is micro-regulation that makes things worse.

Apologies, but I will need you to explain to me how the things you listed lead you to the statement that regulations caused the crisis.

The FED, I imagine, you are complaining about interest rates too low for too long. Fine.

FDIC? Please explain yourself.

TBTF? What regulation are you citing that enables too big to fail? All proponents of financial reform endorse regulation so that TBTF DOESN'T exist.

Freddie & Fannie's market share of sub-prime was about a third. Private sector went overboard without too much help. Additionally, to blame Fannie and Freddie is to ignore the OTHER crisis, that is commercial real estate. These agencies don't have a dime there.

Gov't influence on rating agencies: again, please explain yourself. Most critics of the ratings agencies point to the conflict of interests that exist from the rating agencies being paid by the very institutions who are submitting the instruments for rating.

Micromanagement of every aspect of starting & running a bank: Sure it becomes difficult, but I would like for you to explain to me how micromanagement INCREASES RISK and creates malinvestments.

CRA. REALLY? Legislation from 1977 finally came back to haunt us 30 years later? Anyway, the sub-prime portfolios of CRA compliant institutions have performed better than their non-compliant peers. Remember, institutions like Countrywide did not fall under CRA (non-thrift).

I sincerely don't understand the position that regulations were ignored in causing our crisis. I think a wiser perspective is to look at the DEREGULATION of Clinton's second term. Gramm-Leach-Bliley and Commodity Futures Modernization Act, deregulatory efforts, will yield you better culprits.

Does anyone really think that if Brooksley Born had had her way, we would be even worse off?

I'll just nutshell the first two points.

1. In a free market, prices are signals about supply and demand. Interest rates are a kind of price that are SUPPOSED to reflect the supply and demand of capital; however, the FED engages in price control by thinking it can somehow determine the "right" interest rate for everyone, everywhere. When the FED began these price controls, it created the great crash in 1929, just like it helped create the recent crash.

By removing an important market signal from lending, the FED stimulates bubble creation on a massive scale (much more massive than any individual bank could ever achieve on its own in a free market).

The FED <i>is</i> the single largest source of "systemic risk".

2. FDIC promotes irresponsibility. It tells you, the bank customer: "don't worry about whether your bank engages in bad behavior or not - your deposits will be bailed out regardless of where you put them." It tells the bank: "FDIC is responsible for your customer's cash, not you - so go be as risky as everyone else, or else you won't be able to compete."

So, the TBTF banks need a scare huh? how about this scare, WE, THE PEOPLE, WHO YOU FEED off of, to make your $$$$$ and profits, will move OUR cash from YOUR institutions, to credit unions. Scared now corrupt bank CEO's? I hope you are reading this, because that's what it will come to.

If you don't like what businesses do with government money, stop shoveling it out to them.

Umm...those aren't "regulations", they are "regulatory agencies". And, to Scott's point, yup, if you don't enforce the rules, there's no point in having them. Though, before we do any of that, maybe we all need to take a nice look at all the banks books? After all, how are you going to address the dirty laundry if you don't know how much detergent to buy?

I've said it once before on this blog, I'll say it again. (No, I don't normally "yell" this way, but the anger level is just too great.) To the big banks:


When you can be trusted to pick up your own room and not count on your parents to do it, we'll consider relaxing/removing the punishment. (YOU ARE _STILL_ GROUNDED!)


With Generous Support From...