« Buy low, sell high: hard to execute | Main | Understanding of Information Uncertainty and the Cost of Capital »

State of Bank Regulation

In 2011, Jamie Dimon, chief executive of JPMorgan Chase, said that the proposed rules to overhaul derivatives, a commonly used financial instrument, "would damage America." He also said that the Basel rules were "anti-American." Comment letters filed by lobbyists with regulators used sophisticated-looking models to show how rules could hold back the economy.

"As far as the banks are concerned, there is never a good time to raise capital or increase regulation," Ms. Bair said. "When times are bad, they say it could hurt things, and when times are good, they say they don't need it."

Some analysts, however, caution against reading too much into the banks' strong profits.

Though banks have been preparing for new rules for months, many of them have not been fully executed, which means the true costs of the measures will not be known until later.

Dick Bove, a bank analyst at Rafferty Capital Markets says that, while bank profits have hardly suffered from new regulation, their customers have. Lenders have simply passed on many of the costs, mostly in the form of new fees, he said. "The government aimed a Stinger missile at the banking industry and missed and hit the consumer instead," said Mr. Bove, who also notes that loans to small business are still weak.

In addition, bank profits may not be as strong as they look, say some analysts. Earnings appear less impressive when taking into account the new capital that banks have to hold. This can be seen when applying a metric called return on equity, which reflects the extra capital.

Financial companies in the Standard & Poor's 500-stock index had a 7.9 percent return on equity last year, according to data from S.& P. That's below the 10 percent return for utilities last year, also a regulated industry. And the banks' return is down from the 16 percent return that they achieved in 2006.


TrackBack URL for this entry:

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)