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March 6, 2015

The Biggest Banks Aren’t Ready to Shrink

“Jamie Dimon never quits. After Sandy Weill forced him out of Citigroup in 1999, Dimon staged a comeback that returned him to the pinnacle of banking as chief executive officer of JPMorgan Chase. After he was diagnosed with throat cancer last summer, he vowed to beat the disease with radiation and chemotherapy. Now he’s tussling with Janet Yellen’s Federal Reserve, which is ratcheting up the amount of capital the biggest banks must have on their balance sheets as a safety cushion for the next crash. The Fed’s tougher capital rules give the megabanks an incentive to shrink, but Dimon has no intention of doing so. CLSA Americas banking analyst Mike Mayo likens Dimon to the Black Knight in Monty Python and the Holy Grail, who keeps trying to fight while his arms and legs are being lopped off, saying, “It’s just a flesh wound.”

“The conflict is being framed as Jamie vs. Janet, but the real issue is size. Are big banks like JPMorgan Chase unavoidably dangerous? Would cutting them down make the financial system safer? Are there other sources of risk that the government should be focusing on? Understanding the link between size and safety is more crucial than ever, because most of the biggest global banks—not just Dimon’s—are fighting to stay big and important. “We haven’t gone out of our basic businesses,” Goldman Sachs CEO Lloyd Blankfein told Bloomberg TV in January, likening regulation to “background noise.”

“Critics argue that enormous banks have an unfair advantage: Because everyone knows the government wouldn’t dare let them default for fear of starting an avalanche of defaults, they’re able to borrow more cheaply than smaller competitors. So they grow and grow, gorging on cheap financing and becoming more of a threat to the financial system. Eight bank holding companies have almost 60 percent of the assets in the U.S. banking system, Yellen pointedly observed in a March 3 speech.”

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“How worried about this should we be? Very, says Dennis Kelleher, chief executive of Better Markets, a pro-regulation group. “There’s an overlapping interest in the biggest banks and the regulators to overstate what’s been done,” he says. Regulators like to claim they’ve slain the dragon, while banks argue that they can’t breathe, Kelleher says. In fact, he says, “Finance has become the richest industry in the history of the world. It has used that economic power to purchase political power. … I’m not saying nothing has changed, but they’re still one of the most formidable forces in Washington, D.C.”

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Read the full Bloomberg article by Peter Coy here.

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