JP Morgan Chase 2010 Annual Report Download - page 12

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• Globalgrossdomesticproductisexpected
to grow by approximately $50 trillion in
nominal terms ($25 trillion in real 2010
dollar-valueterms)overthenext10years,
an approximately 80% increase.
• Annualcorporateinvestmentsinplantand
equipment (globally running at approxi-
mately$8trillionayear)shouldatleast
double over the next 10 years – our multi-
national clients account for approximately
50% of this.
Eectivelydeliveringonthisgrowing
demand requires strong, healthy financial
institutions. This bodes well for JPMorgan
Chase – we are in exactly the right place.
What will not change: Banks will continue to need
to earn adequate market-demanded returns on
capital
Like all businesses, banks must continue
to earn adequate returns on capital – inves-
tors demand it. Some argue, however, that if
regulation results in better capitalized banks
and a more stable financial system, returns
demanded on capital would be lower to reflect
the lower risk involved. This probably is true
but not likely to be materially significant.
What will change: New regulation will aect prod-
ucts and their pricing
A likely outcome of the new regulations is
that products and their pricing will change.
Some products will go away, some will be
redesigned and some will be repriced.
Last year, we spoke about how we would
adjust our products and services for the new
credit card pricing rules and new overdraft
rules. So I will not repeat them here. In a
later section, I will talk about how we will
adjust to the new restrictions on the pricing
of debit cards.
Highercapitalandliquiditystandardsthat
are required under Basel III likely will aect
the pricing of many products and services.
Two examples come to mind:
Current Basel III rules require banks to hold
more capital and maintain more liquidity to
support the revolving credit they provide to
both middle market and large institutions. In
some cases, the liquidity rules alone require
us to hold 100% of highly liquid assets to
support a revolver. For example, to support a
$100 million revolver, we would be required
to own $100 million of highly liquid securi-
tieswithveryshortmaturities.Weestimate
this would increase our incremental cost on
a three-year revolver by approximately 60
basis points a year. That leaves us with three
options:1)passthecostontothecustomer,
2)losemoneyonthatrevolver,or3)not
make the loan. In the real world, the likely
outcome is that some borrowers will have
less or no access to credit, some borrowers
will pay a lot more for credit, some would
pay only a little bit more and some highly
rated companies might find it cheaper to
provide liquidity on their own, i.e., hold
more excess cash on their balance sheet
as opposed to relying on banks for credit
liquidity backup.
Certain products may disappear completely
because they simply are too expensive to
provide.(Some,likethe“CDO-squares”will
notbemissed.)Forexample,capitalcharges
on certain securitizations will be so high
for banks that either these transactions no
longer will be done or they will migrate to
other credit intermediaries (think hedge
funds)thatcanmorecheaplyinvestinthem.
I will have more to say on regulation in the
fourth section of this letter.
What we don’t know (and we have a healthy fear
of unintended consequences)
Around the world and all at once, policy-
makers and regulators are making countless
changes, from guidelines around market-
making, derivatives rules, capital and liquidity
standards, and more. Many of the rules have
yet to be defined in detail, and it is likely
that they will not be applied evenly around
the world. The combined impact of so much
change – so much unknown about the inter-
play among all these factors and an uneven