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July 18, 2013

High Profits Signal Danger for Big Banks

In their latest earnings reports, the biggest banks in the United States are reporting eye-popping levels of profitability that surprise even Wall Street analysts. Goldman Sachs’s profit doubled in the second quarter of this year from the comparable quarter a year ago. JPMorgan Chase could make $25 billion for the whole year. Bank of America reported that net income rose 63 percent. Even Citigroup, so often the sick man of American megabanks, managed its best results since 2007, with $4.2 billion in net income in the quarter.

These results create a major political problem for the big banks, a point that Tom Braithwaite has made in The Financial Times (subscription required). Executives at these companies have spent most of the last four years asserting that stronger regulation in the United States, including higher capital requirements, will result in lower profits, a reduced ability to lend and a slower economic recovery for the nation.

Yet higher capital requirements are already in place, with further steps in the works, including a tougher leverage ratio at the initiative of the Federal Deposit Insurance Corporation (so the country’s biggest banks would need to finance themselves with relatively more equity and relatively less debt). And regulation has tightened to some degree. There is also more political scrutiny – hence executive compensation is being held below the levels that were previously associated with this much profit.”

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Read full New York Times Economix Blog post here

 
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