To Big To Succeed? Feds Might Force Breakup Of USA’s Biggest Bank
JP Morgan Chase could be worth more broken up into its component parts if the government adopts proposed regulations for large banks, according to an analysis by Goldman Sachs.
According to Bloomberg, the report released by Goldman on Monday says that JP Morgan share prices could increase between 5 percent and 25 percent, depending on the scenario, if the bank were to split its four main businesses.
JP Morgan currently has separate units for handling consumer business, commercial banking, investment banking, and asset management, but the Goldman report says these currently trade at a discount of 20 percent or more to stand-alone peers, largely because JP Morgan’s large size exposes it to a greater legal and regulatory burdens.
Fortune reports that, “Banking reform advocates have long called for the nation’s biggest banks to be broken up,” arguing that the biggest banks have become “too big to fail,” thereby forcing taxpayers to bail them out when they engage in risky behavior. (RELATED: GOP Pushing for Tougher Measures to End ‘Too Big to Fail’)
The Federal Reserve, hoping to reduce the threat of future bailouts, proposed increased capital requirements for “global systemically important banking organizations” in December, which would require eight U.S. banks to maintain higher capital reserves relative to their outstanding loans than they currently do.
The increased reserve requirements, Fed Chairwoman Janet Yellen said at the time, “would encourage such firms to reduce their systemic footprint and lessen the threat that their failure could pose to overall financial stability.”
Ironically, JP Morgan’s present large size, which the Fed considers so dangerous, is partly due to its acquisition of several struggling rivals — at the Fed’s behest — during the 2008 financial crisis. (RELATED: Janet Yellen has been Keeping Some Strange Company Recently)
The exact reserve requirement would vary according to a bank’s “systemic risk profile,” but Fortune estimates that JP Morgan “would be required to have enough capital to cover 11.5 percent of its riskiest assets,” or as much as two percentage points more than its closest competitors would need to hold.
The report’s author, Richard Ramsden, argues that the proposed capital requirements make now a good time for JP Morgan to consider a split, because each of its businesses would then be small enough to escape the regulations, but still “strong enough to stand on their own.”
But Bloomberg points out that “the move would reverse much of CEO Jamie Dimon’s work since taking over JP Morgan in 2006,” making it uncertain whether he would accede to such a move.
Under Dimon’s leadership, the bank has grown into the largest U.S. lender by assets and the world’s biggest investment bank, which Dimon believes “creates opportunities to cross-sell products and better serve clients.” (RELATED: Conservatives Demand Equal Treatment From the Fed)
In a 2014 letter to shareholders, Dimon explained that, “Each of our four major businesses operates at good economies of scale and gets significant additional advantages from the other businesses,” and asserted that such synergy “is one of the key reasons we have maintained good financial performance.”
Ramsden, on the other hand, claims that, “Our analysis indicates that even accounting for lost synergies, a JPM breakup would be accretive to shareholders in most scenarios,” not least because most of those synergies exist within, not across, divisions.
JP Morgan has so far declined to comment on the Goldman report, but may well be considering its recommendations carefully. In 2014, Fortune claims, the bank’s share rose just 7 percent– “half as much as Bank of America’s shares and significantly trailing the performance of Well Fargo’s stock, which was up more than 20 percent.”
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