It’s often the case that when someone doesn’t want to talk about something, it only invites more questions.
That’s certainly how it felt on a conference call that JPMorgan Chase held Friday to discuss its second-quarter financial results. The earnings were relatively strong. Yet for much of the call, the stock analysts who cover JPMorgan asked questions about how a potentially nettlesome regulation might affect the bank.
The bank’s chief financial officer, Marianne Lake, was willing to discuss the subject, but only up to a point. There was one number she seemed to not want to reveal. The issue relates to something called the leverage ratio, a measure of how much capital a bank has.
Since the financial crisis of 2008, regulators have been introducing new rules on capital because they feel higher capital levels makes banks more able to weather storms. That’s because capital can act as a financial cushion that absorbs losses in troubled times. To measure whether it is sufficient, capital is often expressed as a percentage of a bank’s assets. For instance, a bank with $3 in capital and $100 in assets would have a leverage ratio of 3 percent.
This week, regulators proposed a new leverage ratio rule. They want large banks to hold capital that meets a certain percentage of assets, plus other risks embedded in their balance sheets. And it measures the ratios at different places in the bank’s corporate structure.
At the parent company, the leverage ratio would effectively have to be 5 percent. Meanwhile, regulators want the ratio to be 6 percent at the banking subsidiaries that are covered by federal deposit insurance.
The banks have two months to comment on the rules, during which they are almost certainly going to request changes. Once the proposed rules are put into effect, banks will have until the end of 2017 to comply with the new leverage ratios.
On Friday, JPMorgan Chase estimated that it was already close to meeting the 5 percent requirement at its holding company, saying it had enough capital to get to a 4.7 percent leverage ratio there.
Naturally, analysts also wanted to know whether JPMorgan Chase’s deposit-gathering subsidiaries, which are far larger than the holding company, were close to meeting the 6 percent requirement.
“Do you have any sense that you could give us of where you stand on the leverage ratio at the bank level today relative to the 6 percent requirement?†John McDonald, a bank analyst at Bernstein Research, asked on Friday.
Ms. Lake responded that she would not disclose the bank leverage ratio. She added that it was lower than at the holding company.
A few minutes later, Betsy Graseck, a bank analyst at Morgan Stanley, tried. “I’m just wondering why no bank-sub disclosure. I realize that is different, but â€" and I heard your answer earlier â€" but I’m just wondering,†she asked, why the number was not provided.
Ms. Lake replied, “So, Betsy, there’s nothing sinister underlying it.â€
The chief financial officer did offer some hints, however.
She said the bank subsidiary leverage ratio would be “small tens of basis points†lower than the 4.7 percent level at the holding company. A basis point is a hundredth of a percentage point. Therefore, the leverage ratio for JPMorgan Chase’s bank subsidiaries might be around 4.4 percent.
Under the proposed rules, those entities would eventually have to increase their capital holdings so they are at 6 percent.
Right now, that would mean JPMorgan Chase would have to raise capital by $40 to $50 billion at the subsidiaries. Analysts at Goldman Sachs and Keefe, Bruyette & Woods estimate a shortfall of as much as $47 billion, which is a far higher theoretical dollar deficit than exists at other large banks’ insured subsidiaries.
(However, Bank of New York Mellon’s deficit is higher as a percentage of existing capital, according to Keefe, Bruyette & Woods).
A capital hole of nearly $50 billion is significant even for a bank as big and profitable as JPMorgan Chase. That may be why the bank didn’t want to go into further detail. The fact that its dollar deficit seems to dwarf that of other banks may also be a source of discomfort. For instance, Goldman analysts estimate Citigroup only falls short by $10 billion at its insured entities.
Mark Kornblau, a JPMorgan Chase spokesman, declined to add to what the bank’s executives said on the Friday call about the leverage ratio.
On that call, JPMorgan Chase executives said the bank could increase its leverage ratio at the bank subsidiaries by moving assets or unwinding derivatives, the financial contracts that generate substantial trading revenue for JPMorgan Chase (as well as some losses, as shown by the London whale debacle last year).
Indeed, if JPMorgan does end up getting hit harder by the new leverage ratio, it may not be a complete accident.
Regulators have long tolerated immense amounts of Wall Street business taking place within insured subsidiaries. But the proposed leverage ratio may be the regulators’ new way of forcing banks to hold higher capital to protect against potential trading losses in such entities.
Goldman Sachs estimates it would take JPMorgan Chase two and a half years to earn the capital it needs to plug the hypothetical gap at is subsidiaries. This matters for shareholders. Using earnings to bolster capital might restrict what the bank can pay out in dividends and spend on stock buybacks. On Friday, JPMorgan Chase’s chief executive, Jamie Dimon, said the bank could step up distributions to shareholders and meet the new leverage ratio requirements. A bank of JPMorgan Chase’s profitability probably can do both.
Still, shareholders might feel more confidence about that assertion if the bank had detailed just how much extra capital it might have to find.
