Dal­las Fed cap shrink­ing US bank­ing units by half

The Pak Banker - - COMPANIES/BOSS -

A pro­posal by the Fed­eral Re­serve Bank of Dal­las to limit government sup­port for banks could force JPMor­gan Chase & Co and Bank of Amer­ica Corp to shrink their US con­sumer and com­mer­cial- lend­ing units by more than half.

Richard Fisher, pres­i­dent and chief ex­ec­u­tive of­fi­cer of the Fed­eral Re­serve Bank of Dal­las. The pro­posal put for­ward by Fisher and Ex­ec­u­tive Vice Pres­i­dent Har­vey Rosen­blum would re­quire sep­a­rate cap­i­tal­iza­tion and fund­ing for in­vest­ment- bank­ing and trad­ing units with­out forc­ing firms to break up.

The plan would cap as­sets at de­posit-in­sured di­vi­sions of the largest U.S. fi­nan­cial firms at about $250 bil­lion and wall off in­vest­ment bank­ing from tra­di­tional lend­ing, Dal­las Fed Ex­ec­u­tive Vice Pres­i­dent Har­vey Rosen­blum said in an in­ter­view. The limit is needed to al­low the Fed­eral De­posit In­surance Corp. to shut a failed bank with­out us­ing tax­payer funds, he said.

Rosen­blum and his boss, Dal­las Fed Pres­i­dent Richard Fisher, join a cho­rus of Demo­cratic and Repub­li­can pol­icy mak­ers in ex­press­ing dis­sat­is­fac­tion with ef­forts to as­sure that banks are no longer too big to fail. FDIC Vice Chair­man Thomas Hoenig has called for break­ing up the largest lenders and Se­na­tor Sher­rod Brown, an Ohio Demo­crat, for lim­it­ing their size.

“While we en­act high and deep Chi­nese walls be­tween com­mer­cial bank­ing and the rest of the mega­banks’ op­er­a­tions, we also need to make sure the de­posit-in­sured units are of a size that they can be closed and re­solved quickly,” Rosen­blum said. “Com­mer­cial bank­ing is risky enough on its own.” Fisher re­vealed the out­lines of the pro­posal in a Jan. 16 Washington speech. He didn’t spec­ify what the cap would be at the time. The two wrote an op-ed piece for the Wall Street Jour­nal this week de­fend­ing their plan to make tra­di­tion­al­bank­ing units “too small to save” with­out putting a dol­lar amount on the limit.

While Congress prob­a­bly won’t en­act new bank­ing leg­is­la­tion so soon af­ter the 2010 Dodd-Frank Act, Fisher and oth­ers can pres­sure reg­u­la­tors to be tougher, ac­cord­ing to Brian Gard­ner, a Washington pol­icy an­a­lyst at Keefe, Bruyette & Woods. The law has given the Fed and the FDIC author­ity to break up firms they deem threat­en­ing to the fi­nan­cial sys­tem, he said.

“We’re not go­ing to have an AT&T moment,” said Gard­ner, re­fer­ring to the 1984 breakup of the phone com­pany. “But the reg­u­la­tors are go­ing to use their pow­ers and new tools to make life so tough for the big banks that they’ll end up shed­ding as­sets, busi­nesses and break­ing up de facto on their own.”

JPMor­gan’s U. S. con­sumer and com­mer­cial-lend­ing units had as­sets of $646 bil­lion at the end of De­cem­ber, ac­cord­ing to a reg­u­la­tory fil­ing by the New York- based bank. Sim­i­lar di­vi­sions at Char­lotte, North Carolina- based Bank of Amer­ica had $686 bil­lion of as­sets. That means each would have to shrink by about 60 per­cent to drop be­low the Dal­las Fed’s pro­posed cap. JPMor­gan is the largest U.S. bank by as­sets, and Bank of Amer­ica is No. 2, when all their busi­nesses are in­cluded.

Cit­i­group Inc, the third­biggest lender, would need to re­duce its US con­sumer unit by about 30 per­cent. Tra­di­tional bank­ing in the U.S. makes up a smaller por­tion of the New York- based firm’s to­tal as­sets than at peers. San Fran­cis­cobased Wells Fargo & Co. (WFC), the fourth-largest U.S. bank, might have to shrink about 70 per­cent. Es­ti­mates of how much lenders would need to trim to com­ply with lim­its pro­posed by Fisher and Rosen­blum aren’t ex­act be­cause firms don’t break out data the same way and some­times count as­set- man­age­ment or in­vest­ment-bank­ing as­sets in their con­sumer units. Rosen­blum said the cap hadn’t been set firmly yet be­cause fur­ther study is re­quired.

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