DIMON IN ROUGH PATCH WITH THE FED / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

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JUNE 8, 2011, 5:31 P.M. ET.

Dimon in Rough Patch With the Fed



By DAVID REILLY


James Dimon is sweating.


The J.P. Morgan Chase chief on Tuesday breathed new life into a longstanding spat between bankers and their regulators, who are trying to rein in the financial sector. Speaking during a televised question-and-answer session after an important speech by Federal Reserve Chairman Ben Bernanke, Mr. Dimon said he feared an onslaught of regulation is why the economy and job creation are sputtering.


Mr. Dimon's real nightmare, though, concerns the future of his own bank. J.P. Morgan and its too-big-to-fail peers—Bank of America, Citigroup, Goldman Sachs and Morgan Stanley—have found themselves in a battle with regulators that will determine their future shape, size and profitability.


While directed at Mr. Bernanke, Mr. Dimon's comments were actually aimed at another Fed governor, Daniel Tarullo. The point person within the Fed for bank regulation, Mr. Tarullo gave a speech last Friday that jarred bankers by suggesting that those deemed "too big to fail" could be required to hold a capital buffer equal to as much as 14% of certain assets, double the current expected requirement.


That has Mr. Dimon seeing red. At 14%, the biggest banks would have to hold billions of dollars more in equity. And they would likely struggle to generate returns on equity above the average of 11.5% seen since 1991 by banks with more than $10 billion in assets.


In essence, too-big-to-fail banks would face a stark choice: shrink or become financial utilities.

Mr. Dimon and other executives from big banks argue this would hobble the U.S. economy and erode the country's global competitiveness. And, of course a healthy financial system does require banks to be able to generate economic returns to attract capital and extend credit.


Yet big, systemically important banks may be overstating their impact—at least when it comes to job creation. In a speech earlier this week, Dallas Federal Reserve Bank President Richard Fisher noted that despite holding 64% of all banking assets, the country's top 10 financial institutions hold only about 20% of small-business loans.


And when it comes to lending, banks aren't hurting for funds. They have $1.54 trillion in reserves above what they are required to hold by the Fed. Deposits, meanwhile, have soared and as a percent of total banking assets are at their highest level since the fourth quarter of 1994, according to Federal Deposit Insurance Corp. data.


J.P. Morgan itself isn't doing badly. Last quarter's net income of $5.5 billion was its highest-ever, and it recently got permission from the Fed to spend up to $8 billion this year buying back stock.


And of course, any drag on lending from higher capital requirements has to be weighed against the cost to taxpayers and the economy from a financial crisis like the one that has just hobbled the economy.


There is a debate to be had over Mr. Tarullo's aggressive starting point on capital. But he seems to have hit on an approach that will force banks themselves to deal with being too big to fail. Mr. Dimon's unease bears this out.


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