The Fed's Proposed Large Bank Regulatory Capital Increase

The banking community is shocked- shocked!- at the Fed's proposal to add about 3% to required regulatory capital for the 'too big to fail' crowd.

One large bank CEO, Jaime Dimon of Chase, went so far as to try to embarrass Helicopter Ben during the Q&A after his speech in Atlanta yesterday. I just saw Bernanke's reply on CNBC a few minutes ago, after having to endure senior economic idiot Steve Liesman's attempt to restate Dimon's comments. Fortunately, though, there was audio of the native New Yorker's signature accent delivering his diatribe.

Much was made of how great Chase was, how it was a lower-risk bank during the financial crisis, and how important a CEO Dimon is. The implication being that since Jaime asked these questions and pointed out various facts, well, they must be important.

What Dimon asked, to summarize, was why, with SIVs gone, CDOs moribund, some banks gone, and most housing finance excess gone, there was now a need to raise capital requirements on large banks? And did anyone study the potential effects of such increased regulatory capital on interest rates, loan volumes, economic activity and- hold your breath, because Dimon gets positively statesmanlike on this next one- JOB GROWTH!

My God! Raising capital requirements must be un-American!

Well, not quite.

I've written in a post some years ago that banks want to portray themselves as competitive companies in terms of equity values and growth, even though the business in which they are in doesn't lend itself- no pun intended- to such dynamics. And the traditional nosebleed level of regulatory capital/risk assets doesn't really matter once risk becomes loss. Which happens in as little as one or two days, if not overnight. Ask the former executives of Bear Stearns.

Although banks like Chase have been forced to lessen their proprietary equity trading, their business is to hold financial assets, some of which have values which can change rapidly and, at times, in unexpected directions.

Current capital levels don't begin to cover what can occur on a large bank's balance sheet. Never mind, now that Dodd-Frank is law, what the geniuses at the banks will invent next, now that they have a fixed regulatory target around which to maneuver to evade capital requirements and other nettlesome regulations.

Former Goldman banking analyst Bob Albertson was on CNBC as a follow-up to the Bernanke-Dimon exchange to shill for the banks. He sagely intoned that nobody in government knows what the effects of their regulations will be.

True enough. And Dimon's question regarding research into said effects was simply theatrical. Everyone knows that such research wasn't and won't be undertaken. From a statistical sense, it's likely far too complicated, with too many variables for which to control, and too many to study, to ever develop sufficient data to draw conclusions.

But after you get by Dimon's- and Albertson's- smoke and mirrors, remember that this sector ran amok only a few years ago, with the help of Congress, sleepy Fed and FDIC regulators, and Fannie and Freddie buying off overseers and most of Congress. Collectively, the American taxpayer and the economy footed the bill for these excesses, next to which an added 3% of risk assets is a pittance.

Will BofA's equity be diluted nearly 50%? Maybe so. And maybe Tom Brown will have second thoughts. He was on Bloomberg yesterday morning singing Dimon's praises- no surprise there, eh?

The reality of large bank equities, however, is that they are timing plays. These companies don't typically exhibit consistent behavior. So once you acknowledge that to buy and sell them is to engage in market or sector or even company timing, surprises like added capital requirements are just part of the risk of playing that game.

From a historical perspective, however, it's hard to argue that having large, nearly-unmanageable and uncontrollable financial institutions which are slated to be taken over by the government after their next series of lethal mistakes, hold some added capital, is indefensible.