TBTF HAS BEEN SOLVED - ONE VIEW FROM 270 PARK AVENUE...

As recently as 2014, Martin Wolf of the FT, a respected and well connected financial markets commentator and Fellow at Oxford University, agreed with BOE Governor Carney and argued that the risk of To Big to Fail (TBTF) continues to plague financial markets1. Roll forward several years and while financial institutions in certain jurisdictions continue their journey towards greater levels of capital and liquidity as well as adopting various forms of risk governance, challenges remain in the banking sector WRT to culture and sales practices (US), whistleblowing (UK), NPLs (Italian banking) and capital (Germany until recently). Yet, some institutions are now arguing that TBTF has been dispatched with fully and utterly

One feature of the JP Morgan & Co Shareholder Letter is the opportunity to hear the views of veteran banker Jamie Dimon. The 2016 Shareholder Letter2, includes his musings on the state of affairs of US bank regulation and is well worth a read for anyone involved in banking or its oversight. Dimon makes several points worth repeating: BHCs enjoy greater levels of capital and liquidity access than before the crisis, pillar 3 and other levels of transparency encourage market discipline, massive investments into compliance have occurred to better monitor and report risks, and resolution plans (for lack of a better word) are better honed to prevent actual bankruptcy.  Dimon also points out that the Fed's stress tests, which generate extreme loss calculations, demonstrate that such losses can be funded many times over given actual capital levels (he uses combined extreme losses and combined losses in his arguments). 

I wonder what would Anat Admati and Martin Hellwig, who authored the book The Banker's New Clothes, have to say about about that? Would they accept today that enough has been done to tame a bank's externalised impact of default or argue as before that much greater levels of capital does not impact a bank's lending capacity in normal circumstances?

I recently checked out the Banker's video on the world's largest banks (measured by equity capital) and the Chinese banks continue to dominate followed by American, UK and Japanese players. On simply a comparative measure, when one considers the advances made by US banks to strengthen their capital bases and liquidity planning combined with the adoption of improved risk governance relative to others, I must admit that Dimon has a good point that large US banks have earned the right to argue that TBTF has been mitigated, assuming they continue to improve not only the size but the quality and risk taking culture of their firms. Surely more to come on this timely subject. 

1. TBTF is To Big to Ignore, FT, April 15 2014.
2.  See https://www.jpmorganchase.com/corporate/investor-relations/document/ar2016-ceolettershareholders.pdf

Comments