As reported in the New York Times, JPMorgan Chase (JPM) will see almost every aspect of their business affected by the new reforms in the proposed Dodd-Frank act.
The bill, which has moved to the Senate for a final vote, would impose stricter consumer lending guidelines and lower transaction fees on debit cards. In that regard, the bill would affect most of the now infamously labeled “too-big-to-fail” banks.
In fact, recent legislation has already taken a bite out of bank revenue. The Dodd-Frank act would add to that drain by restricting the fees banks can charge for debit card transactions.
1. Derivatives. It’s well known that JPMorgan Chase has the largest exposure to derivatives. The Dodd-Frank Act would establish clearinghouses for buying and selling derivatives. Currently this would require JPMorgan Chase to leave billions of dollars tied up as collateral, billions which otherwise could have gone toward lending or their own trading.
Even smaller trades, that didn’t go through clearinghouses, would likely take place over exchanges – putting further pressure on prices and profit margins.
2. Hedge Funds. Their $21 billion Highbridge Capital unit is the largest hedge fund in the banking industry. Under the new guidelines, banks would be required to hold more capital in reserve to cover potential losses. And, they may be prohibited from using federally insured bank deposits for risky trading.
JPMorgan has already begun dismantling its so-called proprietary trading operation, to comply with new restrictions on banks making speculative bets using their own capital. Analysts say that will force the bank to give up about 2 percent of its revenue.
Under the proposed bill, the bank would also have to be more careful about separating its money from the money it manages for clients in its private equity and hedge fund units, because of a rule to limit the amount banks can invest in such funds. Still, JPMorgan would be able to hang on to Highbridge and several other investment funds because of a special exemption.
Says Keith Horowitz, a Citigroup analyst, “Given its franchise diversity, JPM is impacted by virtually all of the coming regulatory reforms.”
In his research note, Mr. Horowitz estimated that the legislation would ultimately reduce the bank’s earnings by as much as 14 percent. That estimate could be cut in half or more because several of the most severe measures in the bill have since been dropped or diluted.
Of course, these assessments do not take into account all the steps that JPMorgan and other banks could take to mitigate the effect of the legislation, like passing on some costs to customers or seeking exemptions from regulatory agencies.
Indeed, JPMorgan could feel a greater effect from deliberations taking place at the United States Federal Reserve and among central bankers in Switzerland. Both sets of regulators are considering a requirement that banks hold additional capital as a cushion against losses. They also may alter the businesses the banks can invest in, or the regions where they can expand.
