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| Thousands of pages of regulation upcoming |
There was a time when regulatory compliance, even for the biggest of financial institutions, was managed by a modest-size staff within a silo detached from most bankers, traders, sector leaders, and research analysts. Quarterly compliance with bank capital requirements was always "someone else's" responsibility, the job functions of others less attuned to core bank activity.
Bankers understood the importance of compliance, but they conducted business without much regard to the gory details of SEC or OCC rules--unless they were kindly tapped on their wrists to be mindful of the capital that was required to book new loans or new trades or expand business units. Reserve requirements (for deposits) were monitored by "others" (compliance officers). In good times before the crisis, most profitable banks presumed they could manage requirements without much fuss.
These are new days and times. Compliance and building the complex structure to ensure banks comply today and in the years to come are top priorities for regulators, board members, and bank leaders.
In years past, JPMorgan's CEO Jamie Dimon ranted against the reams of new regulation crash-landing in the lobbies of banks in the late 2000's. New regulation and rules were imposed on banks as long-term penalties for what happened in 2007-09. New rules would be so restrictive, he and some of his cohorts argued, that banks will operate with arms in slings and hands tied to perform the most basic services. To comply, banks would need to jettison product lines, pare down to basic activities, and increase prices across the board just to achieve below-average 10% returns on equity. Regulators, for sure, haven't had an issue with the industry's back-to-basics reorganization.
This year, Dimon in his state-of-the-industry letter to JPMorgan Chase shareholders presented no raging argument, no rant that new regulation is overwhelming banking. It is what it is. And some of it, he admits, is good for the industry and the financial system.
Instead he offers a logical presentation of what it will take for a major financial institution like JPMorgan to comply with thousands of new rules and requirements. JPMorgan, he promises, will spare no expense or investment to ensure compliance. He says JPMorgan will be a model citizen for compliance. Expenses are increasing $2 billion annually just for compliance, and the bank will invest over $600 million in systems and infrastructure to keep the compliance machine running properly.
Shareholders must understand the true impact of regulation. He explains to shareholders (and to the public at large) that the task is arguably more challenging than, say, the most daunting, most complex bank merger. And bank mergers are usually always difficult, cumbersome, and frustrating.
After a nightmarish year with regulators and law-enforcement officials and after billions in settlements, JPMorgan insiders may have decided it serves no purpose to step on a pedestal to agitate about the burdens of regulation. Regulators, too, likely wanted to see nothing of the sort and may have conveyed their expectations on how banks should behave in public.
Let's examine the scope of the burden outlined by Dimon, who didn't whine much about those additional expenses to the bottom line. Dimon reminds readers often there are hundreds of pages and thousands of rules. All those pages and lines of rules apply to--at least at JPMorgan--to dozens of its subsidiaries and operations around the world.
New laws and requirements will be enforced by several regulatory bodies, including the familiar overseers such as the Federal Reserve and the SEC. Most industry followers know the well-known Dodd-Frank, Basel III, and Volcker regulation or at least have a big-picture understanding of what that is intended to do. Banks started a few years ago reorganizing their operations and raising new capital to meet requirements that become more restrictive in the next few years.
But there are batches of other regulation, too, including rules related to "Living Wills" (Recovery and Resolution, which forces banks to outline a plan for orderly liquidation or wind-down, if that scenario is necessary) and rules related to something called "CCAR" (which requires large banks to pass periodic stress tests to show they can survive worst-case scenarios).
There are other new acronyms: "SIFI" (which will impose requirements on "systemically important financial institutions"--including big banks and some insurance companies) and "AML" (an old, updated rule that requires banks to implement practices to discourage money laundering). "MiFID" regulation will be enforced in Europe.
Overall, bank regulation in the U.S., Europe and Asia will have impact on the following activities and balance-sheet items (broadly speaking) at JPMorgan: capital, loans, derivatives, trading, clearance, liquidity, leverage, mortgages and securitizations.
This is exponentially more complex than it appears here. For example, there are capital-requirement rules that apply to many JPMorgan entities and operations. Yet some of the same operations are subject to different capital rules from different regulators in different countries. Dimon even suggests there could arise conflicting cases, where the bank attempts to comply with a capital or leverage rule by one regulator, but breaches, say, a liquidity or trading rule by another. ("Unintended consequences," he explained and outlined three years ago.)
Check the personnel requirements and the level of detail those bank officers must immerse themselves in to ensure ongoing compliance. Stress testing (CCAR, or Comprehensive Capital Analysis and Review) has 750 requirements, Dimon points out; about 500 people at JPMorgan will be involved in some way to gather data, devise models, conduct tests and prove compliance.
Rules related to liquidity and funding (Liquidity Coverage and Net-stable Funding) have 250 lines of requirement, and about 400 people could be involved in related compliance (including data gathering, accounting, cash management, funding management, etc.). Derivatives trading and clearing will be overhauled entirely. There are 2,000 pages of new rules, requiring 700 people to help build a new derivatives operation.
Regulation tied to stress tests (SIFI, Recovery and Resolution) evaluates whether banks have a sufficient capital cushion to survive market crashes, unexpected market events, or any other debilitating scenario. Some call this regulation for financial institutions "too big to fail." Whatever, JPMorgan must adhere to requirements and says 35 separate subsidiaries are subject to the test.
Anti-money laundering procedures have been in place at the bank for over a decade, but with even more onerous requirements for diligence, JPMorgan now says over 8,000 people will be involved in related compliance in some way.
Economists, politicians and now financial historians blame the financial crash of the late 2000's on mortgages (including mortgage practices and mortgage trading). It's no surprise, therefore, that rules related to mortgage underwriting, servicing, and securitization now exceed over 9,000 pages.
Dimon showed that compliance, at least at JPMorgan, is no longer a bullpen operation. It's as important an activity as leading a billion-dollar syndicated loan for a Fortune 500 company or advising GE in its next overseas acquisitions. Still not glamorous. Still not an attractive hub for glory-seeking bankers. But sufficiently vital to bedazzle officials at the Federal Reserve and the OCC. And probably vital to ensure the institution will be in superb shape for generations to come.
Tracy Williams
See also:
CFN: Is $13 billion a Lot of Money at JPMorgan, 2013
CFN: Jamie Dimon's Regulatory Rant, 2012
CFN: Dimon's State-of-the-Industry Message, 2011
CFN: Letters to Shareholders of Financial Institutions, 2010
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