JP Morgan Chase 2010 Annual Report Download - page 31

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Wenowwillhave50%morecapitalthan
we clearly needed during the crisis. And
multiple other improvements have been
madetoprotectoursystem.Wesimplydo
not see the need for even more capital, and
we believe the facts prove it.
Banks did not benefit from any kind of implicit
guarantee
The argument that systemically important
financial institutions should hold more
capital than small banks is predicated on
two false notions: first, that SIFIs borrow
money more cheaply because of an implicit
guarantee (and that the cost of higher capital
requirementswillosetthis“benet”);and,
second, that all SIFIs needed to be bailed out
because they were too big to fail.
The notion that SIFIs had an implied
guarantee is completely disproved by the
chart below. It shows the borrowing costs
of Fannie Mae and Freddie Mac – compa-
nies with a true implied guarantee from the
federal government – vs. the borrowing costs
of AA-rated banks and industrial companies.
As you see, the borrowing costs of these
banks were similar to those of AA-rated
industrials, neither of which benefited from
an implicit government guarantee of any
kind. Surprisingly, even after the govern-
ment said that it was not going to allow any
additional banks to fail, the high borrowing
costs for banks continued.
Whileitistruethatsomebankscouldhave
failed during this crisis, that is not true for
all banks. Many banks around the world,
including JPMorgan Chase, were ports of
stability in the storm and proved to be great
stabilizers at the height of the crisis in late
2008 and early 2009. Remember, also, that
some of the banks identified as too big to fail,
in reality, were too big to fail at the time after
so much cumulative damage. At that time, the
too-big-to-fail moniker was extended to large
industrial companies, money market funds,
just about any company that issued commer-
cial paper, insurance companies and others.
We should be very thoughtful about demanding
that global SIFIs hold more capital
Presumably, risk-weighted assets reflect the
riskiness of the company. If there are to be
extra capital charges for SIFIs and global
SIFIs, such decisions should be based upon
logic and proof that SIFIs and global SIFIs
pose a greater risk to the system. Some SIFIs
posed a great risk while other SIFIs did not.
Andthesevariationsin“riskiness”werenot
strictly a function of size. Also, if Resolution
Authority is meant to take care of the too-
big-to-fail problem, then what purpose does
further raising capital levels serve other than
toxaproblemthatalreadyhasbeenxed?
0
100
200
300
400
500
600
700
800
7/2/107/2/0 97/2/0 87/2/07
Source: Morgan Markets
bps
“AA” rated U.S. banks and other industries spreads above Treasury:
Crisis/Post-Crisis (7/2007– 9/2010)
AA-Rated U.S. Banks
AA-Rated Other Industries
Fannie/Freddie
AA-Rated U.S. Banks’ and Other Industries’ Spreads above Treasury:
Crisis/Post-crisis (7/2007–9/2010)
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