On the Eve of Brexit, U.S. Banks Are Set to Conquer Europe

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■ December 13, 2018, 12:01 AM EST

On the Eve of Brexit, U.S. Banks Are Set to Conquer Europe

● Exit Britain. Enter Wall Street.

By Edward Robinson, Lananh Nguyen and Yalman Onaran

With Donald Trump rattling the international order Washington built after World War II, engagement is out and isolationism is in. Yet Wall Street, an expression of American influence every bit as defining as Hollywood or Silicon Valley, apparently didn’t get the memo.

European finance—whipsawed by debt crises and political upheaval since the financial crash of 2008 and now on the verge of the Brexit trauma—is seeing just how internationalist American banks are. U.S. financial powerhouses such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. have been running up the score on their European rivals, dominating investment banking overseas as never before.

The U.K.’s separation from the European Union will cleave Europe’s financial industry in half. London’s diminished role as the financial gateway to the Continent may prevent Europe from matching the U.S. with its own deep, seamless flow of capital. Brian Moynihan, the chairman and chief executive officer of Bank of America Corp., calls this effect “disaggregating liquidity.”

“That’s not going to be good for the economy,” Moynihan said at an industry conference in Boston in November. “It puts them back about 10 to 15 years in the possible development of capital markets, which is critical to a country’s success. At the end of the day, what makes the U.S. powerful is our capital markets and all the capital we can bring to the situation. That just allows us to develop wealth faster for people, and companies can access the capital a lot faster.”

The result: Wall Street’s deepening penetration into the EU. Bank of America is turning a post office in the center of Paris into a trading floor for hundreds. Goldman Sachs, Morgan Stanley, and JPMorgan are shifting capital and staff to Frankfurt, Paris, and possibly other locales. JPMorgan Chase Chairman Jamie Dimon and his peers are increasingly signing up clients for work at the expense of homegrown rivals such as Deutsche Bank AG and BNP Paribas SA. In January, for instance, JPMorgan, Morgan Stanley, and Lazard advised Belgian drugmaker Ablynx and Paris-based Sanofi on a $4 billion takeover that featured no involvement by a European investment bank. This year, five of the six top institutions handling European transactions worth $500 million to $6 billion were American, according to data compiled by Bloomberg.

It’s possible the contest between U.S. and European investment banking will shift again. In the precrisis decade, European institutions were making inroads into the new world. UBS Group AG built an airplane hangar-size trading floor in Stamford, Conn., and Barclays, Deutsche Bank, and Credit Suisse elbowed into the upper ranks for securities underwriting and mergers advice in the U.S. In 2010, top European banks raked in 51 percent of global revenue from trading equities, compared with 44 percent for American lenders.

The UBS trading floor is no more, and Deutsche Bank is the latest European bank retreating from the U.S. In equities trading this year, Wall Street commands 60 percent of global revenue, compared with Europe’s 34 percent, according to data compiled by Bloomberg. The top five U.S. investment banks earned $75 billion in the first nine months of 2018, a quarter more than the same period last year. In contrast, Deutsche Bank, which has been hobbled by CEO turnover and a round of money laundering cases, saw its shares fall to record lows in December. BNP Paribas, France’s No. 1 bank, jolted investors in the third quarter when it reported a 15 percent drop in revenue in fixed income, long considered one of its strongest businesses.

Even before Brexit, Europe struggled to overcome obstacles that would make its lenders more competitive. Brussels’ bid to unify its member states’ banking industries, for example, has foundered. “The fact that European politicians failed to produce banking union is a travesty,” says Barrington Pitt Miller, a portfolio manager with Janus Henderson Group Plc, which holds big stakes in European lenders. “If you’re a U.S. capital markets bank, you are looking at a free runway to step in and take market share.”

As if that weren’t enough, Dimon and Moynihan and their fellow Americans are riding a tailwind courtesy of the U.S. Federal Reserve—a surge in lending revenue. Over the last eight quarters, the Fed has lifted its benchmark interest rate to a range from 2 percent to 2.25 percent, which means banks can charge more for loans. The European Central Bank, nursing a fragile regional economy, has stood fast with a subzero rate. “There’s strong lending growth coming from companies in the U.S.,” says Jan Schildbach, head of research on banking, financial markets, and regulation at Deutsche Bank. “In Europe there’s only modest lending volume growth after years of contraction.”

Wall Street is doing well in Asia, too. U.S. banks take the five top spots in Asian equities underwriting, according to Bloomberg data. In the global business of trading securities, only one Asian lender, Japan’s Nomura Bank Holdings Inc., makes the top 16, with just a 1.7 percent share. In mergers and acquisitions, Asian institutions tend to show up in deals on their own turf. The Bank of China Ltd., for example, leads yuan bond underwriting.

It’s tempting for European banks to conflate the financial industry with the other sources of U.S. economic influence. The dollar continues to be the world’s reserve currency, and the U.S. Department of the Treasury has stepped up its role as a global financial cop—whether on trade with pariah states, policing money laundering, or enforcing tax laws. Foreign bankers and lawmakers bristle at what they call the “weaponization” of the dollar—how its dominance makes it harder for other countries to borrow and trade—and fear that Washington is indirectly giving Wall Street a boost by fining overseas banks billions of dollars.

The EU is starting to push back. Brussels was dismayed by the Trump administration’s withdrawal from the 2015 international agreement to curb Iran’s nuclear program and pursuit of penalties for companies that have renewed doing business with the oil-rich country. So Brussels is trying to cook up a way to get around the dollar-denominated economy to preserve commercial links with Iran.

Indeed, Trump’s willingness to undo long-standing accords on trade, security, and climate change has emboldened rival powers to challenge Washington’s reach. On Dec. 5 the EU unveiled an initiative to strengthen the euro as an alternative to the dollar by calling for companies in the financial and energy industries to denominate more trading contracts in the single currency. China is in its fifth year of rolling out its Belt and Road Initiative, a program worth hundreds of billions of dollars designed to project Beijing’s influence through myriad infrastructure and commercial ventures in dozens of nations in Africa, Asia, and Europe. Russian President Vladimir Putin, for his part, has called on nations to use their own currencies for international trade to blunt U.S. economic power.

Yet when it comes to Wall Street, the great game of geopolitics may ultimately amount to little more than noise. The industry, of course, has only one lodestar: money. And if a tectonic shift such as Brexit creates new opportunities, you can bet America’s big banks will grab a bigger share of business. Still, some fret about what will happen when the cycle turns. “The banks are never going to be terribly good at identifying what would cause them to fail,” says Paul Tucker, chairman of the Systemic Risk Council and former deputy governor of the Bank of England. “There will be a recession at some point, and people will lose money. The economy relies on these banks, and so they need to be able to withstand a lot of stress.”

Theoretical fears of some future downturn aren’t likely to put off Wall Street from making money today. And in the pursuit of profit, America’s global financial profile will grow only more prominent. “That old adage that the business of America is business is still true,” says Curtis Chin, the former U.S. ambassador to the Asian Development Bank and now an Asian Fellow at the Milken Institute. “Soft power comes in many forms.” —With Chitra Somayaji

To contact the authors of this story:
Edward Robinson in London at edrobinson@bloomberg.net
Lananh Nguyen in New York at lnguyen35@bloomberg.net
Yalman Onaran in New York at yonaran@bloomberg.net

To contact the editor responsible for this story:
Howard Chua-Eoan at hchuaeoan@bloomberg.net
James Hertling

BOTTOM LINE – American banks are establishing global hegemony as European institutions retrench even before London loses its place as the world’s financial capital.

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Wall Street Erases the Line Between Its Jocks and Nerds – WSJ

Wall Street Erases the Line Between Its Jocks and Nerds
— Read on www.wsj.com/articles/wall-street-erases-the-line-between-its-jocks-and-nerds-1534564810

What is the amount of Operational Risk Capital at Your Bank?

Civil Antitrust Lawsuits Reinstated Against 16 Banks in Libor Case
May 23, 2016 By Nicole Hong, WSJ
Appeals court restores private suits against Bank of America, J.P. Morgan Chase, Citigroup and others
The lawsuits accuse 16 major banks—including Citigroup, J.P. Morgan and Bank of America—of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ consumers.

In a setback for some of the world’s largest financial institutions, a U.S. appeals court on Monday reinstated the private antitrust lawsuits filed against 16 banks for allegedly rigging Libor interest rates.

The ruling from the Court of Appeals for the Second Circuit reverses a lower court decision from 2013, in which U.S. District Judge Naomi Buchwald dismissed the claims because she said the banks’ alleged conduct did not violate federal antitrust laws.

The lawsuits accuse 16 major banks—including J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ consumers.

The plaintiffs, who owned various financial instruments that were affected by Libor, claim the returns on their investments were depressed by the banks’ collusion. The lawsuits were filed by several groups of plaintiffs, including the local governments of cities like Baltimore, San Diego and Houston.

Judge Buchwald had dismissed the antitrust claims, saying the plaintiffs failed to show they were injured by the alleged rate manipulation. She said that because setting Libor was a “cooperative endeavor,” there could be no anticompetitive harm to consumers.

But the appeals court Monday disagreed and kicked the case back to the lower court for further proceedings. A three-judge panel found that the plaintiffs did show an antitrust injury “by alleging that they paid artificially fixed higher prices.”

Judge Buchwald in 2013 had allowed other claims by the plaintiffs to proceed, including allegations that the banks breached commodities laws, but the antitrust claims were a central part of the litigation, as violations can require a defendant to pay triple damages.

The appellate judges noted that the plaintiffs will still have to prove at a later stage whether the allegedly corrupt Libor rate did have an influence on the prices of their financial investments.

If this litigation is ultimately successful, the potential total bill to banks could be in the billions, analysts have estimated.

A lawyer representing the banks declined to comment, while a lawyer for the plaintiffs did not immediately respond to a request for comment.

Libor, a widely used benchmark that helps set interest rates for everything from mortgages to corporate loans, is calculated daily for different currencies based on estimated borrowing rates submitted by banks on panels. The lawsuits are targeting banks on the panel that sets U.S. dollar rates under Libor.

These private lawsuits are separate from the sprawling criminal and civil probes around Libor rigging, which began in 2008 and have implicated traders around the world. Regulators have accused big banks of letting their traders and executives raise Libor rates up or down to benefit their trading positions.

About a dozen financial firms have settled charges of manipulating Libor, and many have pleaded guilty to criminal charges. The largest penalty imposed was the $2.5 billion paid by Deutsche Bank AG last year.

In total, U.K. and U.S. authorities have imposed sanctions of more than $6 billion in the Libor cases. A series of global investigations are still ongoing, but The Wall Street Journal reported in February that regulators in the U.S. and U.K. are preparing to bring a final round of civil charges against several banks in the probe.

Write to Nicole Hong at nicole.hong@wsj.com

JPMorgan’s Dimon Says Violent Moves in Treasuries Are Possible – Bloomberg Business

Jamie Dimon, chairman and chief executive officer of JPMorgan Chase CEO says the Treasury market is one thing he worries about

Comments aren’t a prediction, just a possibility, Dimon says

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Jamie Dimon, JPMorgan Chase & Co.’s chief executive officer, said the bank will be prepared for the possibility that Treasury prices move violently when interest rates rise.
“The one thing I do worry a little bit about, by the way, is Treasuries,” Dimon said Friday at a conference in New York sponsored by Barclays Plc. “Interest rates have been so low, for so long,” he said, adding that some traders and their managers have never experienced a rising interest-rate environment.
The U.S. banking system is much safer now because of higher capital and business diversification, said Dimon, 59, responding to a question about whether the next U.S. credit downturn would come from banks or non-banks. In April, he called volatility in the Treasury market in late 2014 a “warning shot” to investors.
“So I wouldn’t be shocked to see 10-year Treasuries, when rates are going up, people change their mind, they change direction, that they will be violently volatile and go up much faster than people think,” Dimon said. “I’m not predicting that. I’m simply saying in the back of my mind, I think that’s a possibility.”
His comments followed the biggest single-day rally in six years for two-year Treasuries. After the Federal Reserve announced Thursday it would keep interest rates near zero, yields on the policy-sensitive note dropped by 13 basis points, the steepest decline since the central bank announced it would expand its bond-buying program in March 2009. The rate on 10-year notes fell 10 basis points to 2.19 percent.
JPMorgan has “about the same” third-quarter trading-revenue trends as other banks that have disclosed expectations at the conference, Dimon said. Executives from Bank of America Corp. and Citigroup Inc. have said they probably will report a 5 percent drop in third-quarter trading revenue.
“September is still to go, so who knows,” Dimon said. “I think people are massively over-focused on those numbers.”
Markets

James Dimon

JPMorgan Chase & Co

Interest Rates

New York

Barclays PLC

Flash Move Haunts Bond Traders Heeding Dimon’s Warning of Crisis

Flash Move Haunts Bond Traders Heeding Dimon’s Warning of Crisis

Jamie Dimon, Chief Executive Officer of JPMorgan Chase & Co. Photographer: Andrew Harrer/Bloomberg

Six months after an unexplained flash rally in Treasuries sent markets reeling, bond investors are bracing for it to happen again.

Prudential Investment Management is trading more futures because they’re both liquid and anonymous. State Street Corp. is making smaller bets. And Pioneer Investments is looking for returns in higher-quality securities that are easier to sell.

On Oct. 15, benchmark Treasury yields swung the most relative to overall yields since at least 2000, scarring debt investors who say they’re still trying to figure out why it happened. JPMorgan Chase & Co. chief Jamie Dimon called the move a “warning shot” last week, blaming it on central-bank hoarding of bonds along with regulations that have led dealers to retreat from making markets. Others say the rise of electronic trading is at fault.

Whatever the reason, those trends aren’t changing as the Federal Reserve prepares to raise interest rates for the first time since 2006. Bets on market swings suggest traders expect prices to fluctuate the most of any year since 2011, raising the risk of another flash move.

“There’s potential for extreme conditions in the marketplace when volatility really goes up,” said Steven Meier, head of cash, currency and fixed-income at Boston-based State Street’s money-management unit. “There’s still a lot of unanswered questions about what happened,” and no “clear explanation of what the drivers were.”

Yield Swings

Bond trading has been turbulent this year, driven by uneven economic data, currency moves and Fed changes to its interest-rate forecasts. Yields on 10-year Treasuries have swung from 1.64 percent to 2.26 percent.

Treasuries are the world’s haven asset during turmoil because the securities are supposed to be the most liquid. A market that’s more prone to gyrations has the potential to boost borrowing costs for taxpayers, consumers and companies — in addition to making it harder for the Fed to exit from its record stimulus.

Dimon isn’t the only one warning episodes such as the one on Oct. 15 may happen again. The Treasury Markets Practices Group — an advisory committee on bond-market integrity backed by the Fed Bank of New York — echoed the idea at its February meeting.

Electronic Trading

“There is an increased potential for further episodes of volatility and impaired liquidity in the Treasury markets,” the meeting minutes said. The committee concluded that the move was exacerbated by the dealers’ pullback from the market and growth in electronic trading.

Last year, 48 percent of U.S. Treasury trading happened electronically, according to a survey from Greenwich Associates, up from 33 percent a decade ago. The TMPG said in a paper last week that the trend has improved liquidity, while creating added risks, too.

“In some cases, malfunctioning algorithms have interfered with market functioning, inundating trading venues with message traffic or creating sharp, short-lived spikes in prices,” the group said in an April 9 paper.

Calvert Investments money manager Matthew Duch said the mystery of the flash rally leaves him in a tough spot. He wants to buy more high-yield bonds, but said he’s worried about the possibility that a Treasury-market swing could spark broader volatility, making it tough to trade the speculative-grade debt.

Yield Starved

“Are you getting compensated for the risk? Uh, maybe not,” Duch, whose firm manages $13 billion, said in a telephone interview from his Bethesda, Maryland, office. “But in this yield-starved environment, it’s difficult to find other places to put your money.”

Part of the reason trading has gotten bumpier is that banks are stepping back from market-making, according to Jeffrey Snider, chief investment strategist at West Palm Beach, Florida-based Alhambra Investment Partners LLC.

That’s shown up in the market for short-term financing, known as repurchase agreements or repos, which help grease the wheels for bond trading. The amount of securities financed through a part of the market known as tri-party repo is down 15 percent since December 2012, and more than 41 percent from its 2008 high.

“Funding has just fallen off a cliff,” Snider said. “The system is searching for a stable state, but it hasn’t been able to find one yet.”

BlackRock View

Not everyone is worried that it’s too hard to trade debt these days.

“We feel pretty comfortable with the liquidity,” Michael Fredericks, head of retail multi-asset client solutions for New York-based BlackRock Inc., said by telephone. Fredericks, who manages the $11.5 billion BlackRock Multi-Asset Income Fund, said he’s more worried that investors have gotten complacent about long-term rates staying low.

State Street’s Meier said he is concerned about being able to efficiently trade his holdings, and is making smaller bond trades as a result. Last year, his company recommended clients build up their cash positions and consider derivatives bets, such as swaps and futures.

Interest-rate futures — which are essentially an agreement to buy or sell rates at a later date — have been getting more popular in part because they trade through a clearinghouse, reducing counterparty risk. Trading was up 12 percent in the first three months of the year from the same period in 2014, according to CME Group Inc.

Liquidity Drop

Erik Schiller, a money manager for Prudential’s $533 billion fixed-income unit, said he’s been using futures more because they offer fast and anonymous trade execution during big market swings.

“There’s the potential for these types of moves to happen,” he said. “The liquidity providers in the bond market are less now than they’ve ever been.”

One measure of Treasury dealers’ trading activity has fallen closer to its financial-crisis levels. Deutsche Bank AG’s index that gauges liquidity by comparing the three-month average size of dealer trades against moves in the 10-year note’s yield fell to about 25 in February. It was above 500 in 2005, and reached as low as 19 in 2009 during the depths of the financial crisis.

“If liquidity is as bad as it is now, what’s going to happen when things really get adverse?” said Richard Schlanger, who co-manages about $30 billion in bonds as vice president at Pioneer Investments in Boston. “That’s why we’re trying to get in front of this and buy really good, liquid names.”

More articles on Markets

JPMorgan Chase Chief Says ‘Banks Are Under Assault’

By NATHANIEL POPPER
JANUARY 14, 2015

As JPMorgan Chase reported sluggish earnings and potential new legal costs on Wednesday, its chief executive, Jamie Dimon, lashed out at regulators and analysts, including some who are calling for the breakup of what is the nation’s largest bank.

The bank announced that both its revenue and profit were down during the fourth quarter of 2014, with few bright spots across its many business lines.

The bank’s profits were also dragged down by $1 billion it put aside to deal with a government investigation of wrongdoing on its foreign currency trading desks. The bank has also begun preparing for new rules that are expected to be tougher on JPMorgan than any other financial firm.

During conference calls with reporters and analysts, Mr. Dimon sounded like a chief executive under siege.

“Banks are under assault,” Mr. Dimon said in the call with reporters. “In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

This is not the first time that Mr. Dimon has publicly criticized the new scrutiny and rules that banks have dealt with since the financial crisis. But in the past, Mr. Dimon was often confronting skeptics from outside the banking world. On Wednesday, he faced off against several industry analysts who questioned whether the costs associated with JPMorgan’s heft are outweighing the benefits.

“This is not Elizabeth Warren asking the questions,” said Mike Mayo, a bank analyst at CLSA, referring to the Massachusetts senator and outspoken critic of big banks. “Investors are talking about this.”

Mr. Dimon and Marianne Lake, JPMorgan’s chief financial officer, rebutted any suggestion that JPMorgan would need to be broken into smaller parts to be more valuable, and argued that the bank’s size gave it many advantages against competitors — “the model works from a business standpoint,” Mr. Dimon said.

But some of the analysts questioning Mr. Dimon and Ms. Lake did not seem to be satisfied by the answers and suggested that they expected to hear more about the bank’s efforts to change itself.

The company’s share price ended the day down 3.5 percent, at $56.81.

Mr. Mayo, who was one of the first analysts to call for the big banks to be broken up, pointed out on Wednesday that as JPMorgan had continued to grow it had actually become somewhat less efficient, as measured by the ratio between its expenses and revenue.

When the questions about the bank’s future kept coming on Wednesday morning, Mr. Dimon sounded increasingly frustrated with the analysts.

“This company has been a fortress company,” he said. “It has delivered to clients and its diversification is the reason why it’s had less volatility of earnings and was able to go through the crisis and never lost money ever, not one quarter.”

The bank’s fourth-quarter results, while disappointing, were not terrible for shareholders. The bank said its earnings fell 7 percent, to $4.9 billion, or $1.19 a share, from $5.6 billion, or $1.30 a share, in the period a year earlier. The results fell short of the $1.31 a share expected by analysts surveyed by Thomson Reuters.

Net revenue at the bank dropped 3 percent, to $22.5 billion, from the fourth quarter of 2013. On a so-called managed basis, revenue was $23.55 billion, slightly below the $23.6 billion anticipated by analysts.

For 2014 as a whole, JPMorgan reported profit of $21.8 billion, a 21 percent increase over 2013, and the highest ever annual profit for the company.

In the third quarter of 2014, JPMorgan’s Wall Street operations bolstered the results of the bank. But in the fourth quarter, the difficult trading conditions that have hurt profits at Wall Street firms over the last few years returned.

Revenue from JPMorgan’s once-lucrative fixed-income trading business fell 32 percent from the previous quarter and was down 23 percent from the period a year earlier. Much of the decline was because of businesses that JPMorgan had sold. But core trading was also down 14 percent.

“Banks are under assault,” Mr. Dimon said in the call with reporters. “In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

This is not the first time that Mr. Dimon has publicly criticized the new scrutiny and rules that banks have dealt with since the financial crisis. But in the past, Mr. Dimon was often confronting skeptics from outside the banking world. On Wednesday, he faced off against several industry analysts who questioned whether the costs associated with JPMorgan’s heft are outweighing the benefits.

“This is not Elizabeth Warren asking the questions,” said Mike Mayo, a bank analyst at CLSA, referring to the Massachusetts senator and outspoken critic of big banks. “Investors are talking about this.”

Mr. Dimon and Marianne Lake, JPMorgan’s chief financial officer, rebutted any suggestion that JPMorgan would need to be broken into smaller parts to be more valuable, and argued that the bank’s size gave it many advantages against competitors — “the model works from a business standpoint,” Mr. Dimon said.

But some of the analysts questioning Mr. Dimon and Ms. Lake did not seem to be satisfied by the answers and suggested that they expected to hear more about the bank’s efforts to change itself.

The company’s share price ended the day down 3.5 percent, at $56.81.

Mr. Mayo, who was one of the first analysts to call for the big banks to be broken up, pointed out on Wednesday that as JPMorgan had continued to grow it had actually become somewhat less efficient, as measured by the ratio between its expenses and revenue.

When the questions about the bank’s future kept coming on Wednesday morning, Mr. Dimon sounded increasingly frustrated with the analysts.

“This company has been a fortress company,” he said. “It has delivered to clients and its diversification is the reason why it’s had less volatility of earnings and was able to go through the crisis and never lost money ever, not one quarter.”

The bank’s fourth-quarter results, while disappointing, were not terrible for shareholders. The bank said its earnings fell 7 percent, to $4.9 billion, or $1.19 a share, from $5.6 billion, or $1.30 a share, in the period a year earlier. The results fell short of the $1.31 a share expected by analysts surveyed by Thomson Reuters.

Net revenue at the bank dropped 3 percent, to $22.5 billion, from the fourth quarter of 2013. On a so-called managed basis, revenue was $23.55 billion, slightly below the $23.6 billion anticipated by analysts.

For 2014 as a whole, JPMorgan reported profit of $21.8 billion, a 21 percent increase over 2013, and the highest ever annual profit for the company.

In the third quarter of 2014, JPMorgan’s Wall Street operations bolstered the results of the bank. But in the fourth quarter, the difficult trading conditions that have hurt profits at Wall Street firms over the last few years returned.

Revenue from JPMorgan’s once-lucrative fixed-income trading business fell 32 percent from the previous quarter and was down 23 percent from the period a year earlier. Much of the decline was because of businesses that JPMorgan had sold. But core trading was also down 14 percent.

JPMorgan’s enormous consumer bank also had a drop in revenue in several areas, including credit cards and mortgages, which has slowed down as the national housing market has cooled off.

The bank has been able to attribute some of its disappointing results in recent years to the enormous fines that it has had to pay for wrongdoing before and during the financial crisis.

But while those legal expenses were expected to eventually recede, they have kept coming. This quarter, JPMorgan set aside $1.1 billion — $990 million after taxes — to deal primarily with an industrywide investigation of manipulation in the foreign currency markets. It set aside a similar amount in the previous quarter, but the potential severity of the wrongdoing appears to have increased since then.

Mr. Dimon said that the bank was still bracing for more fines. “It’s going to cost us several billion dollars more somehow plus or minus another couple billion before we get to normal.”

Mr. Dimon said the bank took responsibility for some of the problems that have led to penalties, but he complained that it had been unfair when multiple regulators had come after the bank for the same issue.

The more enduring challenge for the bank, though, may be the new requirements that the bank maintain higher levels of capital than other banks because of its size.

A Federal Reserve official said in December that JPMorgan would most likely to have to raise over $20 billion of new capital, either by holding on to profits or selling more shares to investors. The bank is the only one that is expected to have to raise significant amounts of new capital.

A bank analyst at Goldman Sachs said this month that because of the price that JPMorgan was paying for its size, it may be worth less in its current form than it would be if it was broken apart. On Wednesday, multiple analysts said that regulators seemed to want JPMorgan to be smaller.

Mr. Dimon acknowledged that there could be a point when the additional costs could force it to spin off some businesses. “If the regulators at the end of the day want JPMorgan to be split up, then that’s what will have to happen,” he said. “We can’t fight the federal government if that’s their intent.”

But Mr. Dimon said that his team was confident that the bank would manage to comply with the rules as they have currently been outlined without any major changes. Invoking patriotism, he warned that if his company was forced to shrink, it could open the door for foreign competitors, especially those from China.

“America has been the leader in global capital markets for the last 50, 100 years,” he said. “I look at it as a matter of public policy. I wouldn’t want to see the next JPMorgan Chase be a Chinese company.”

Reforming banking’s risk culture requires breaking “accountability firewall”

Reforming banking’s risk culture requires breaking “accountability firewall”

September 11, 2013 @ 8:09 pm

By Guest Contributor

By Henry Engler, Compliance Complete

NEW YORK, Sept. 11 (Thomson Reuters Accelus) – If there is one part of the cultural makeup of Wall Street that remains firmly in place despite the financial crisis and subsequent avalanche of regulations, it is the reticence among those who lose money to come clean early.

Many of the most spectacular losses in recent years — whether the JPMorgan “London Whale” episode, the UBS “rogue trader” incident, or Jerome Kerviel’s manipulation of internal systems at Société Générale — have all had one thing in common: concealment of trades gone badly wrong, or at a minimum, a lack of transparency and early acknowledgement of losses. And if one can point to a single reason for such behavior, it is the well-known fact that raising the red flag would mean the individual responsible would be shown the door.

The blowup at JPMorgan was noteworthy not just for the size of the loss ($6.2 billion), coming in a unit that was supposed to hedge risk, but also for senior management’s role in cultivating a culture that discouraged individuals to identify problems.

“Ina (Drew) never wanted to hear bad news,” said a JPMorgan bank executive familiar with the management style of the former Chief Investment Officer where the loss was incurred.

In a lengthy piece by the New York Times [1] last year that examined the failure of controls at JPMorgan, CEO Jamie Dimon said: “Honestly, I don’t care what second-guessers say in life If anyone in the company knew, they should have said something. No one came to us beforehand and said we have a problem we should be looking at.”

Dimon’s comment could well have been made by other chief executives. In a scathing review of banking practices by the UK Parliamentary Committee on Banking Standards [2] earlier this year, the panel highlighted a disturbing lack of awareness and accountability by senior managers:

“Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility. Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making… Ignorance was offered as the main excuse. It was not always accidental. Those who should have been exercising supervisory or leadership roles benefited from an accountability firewall between themselves and individual misconduct, and demonstrated poor, perhaps deliberately poor, understanding of the front line.”

The “accountability firewall” might well have been facilitated by management practices that hindered the type of information flow necessary in an effective risk culture. In a separate survey [3] by the London School of Economics, the findings of which are due to be updated in coming weeks, researchers pointed to the fear of punitive action as a primary concern. The study quoted one individual who summarized the views of many:

“One of the things that helps greatly with the flow of information through the organization is how it’s reacted to when it gets to the next level. So being able to report risks openly and honestly without getting your head bitten off from the second that’s done is crucial […] For example, if I told you something that might be happening you do not want your directors on your back saying ‘What have you told them? Why?’ So managing the flow of information through an organization to ensure key stakeholders are properly engaged is quite important […] to avoid the wrong reaction happening.”

What has led us to this state of affairs? And how might it be corrected?

Excesses of short-termism

Establishing a robust risk culture is a subject that management consultants have written volumes on. And when one scours the long list of recommendations, embedding risk awareness across the organization and fostering an environment in which people are comfortable challenging others without fear of retribution are critical components.

But this ideal state would appear far from the current reality at many institutions. In understanding what has led us to an environment of fear and lack of accountability, some argue that the finance sector has taken short-termism to the extreme. The enormous pressures that individuals are under to meet their financial targets, and how those goals are wrapped-up in the quest to meet quarterly revenue and profit objectives, create disincentives to identify risk events early.

“The connection that hasn’t been made is how short-termism invites corrupt behaviour — lawful, but corrupt” says Malcolm Salter of the Harvard Business School, who has written extensively on institutional corruption [4] on Wall Street. In order to rectify the problems, many banks have taken a much closer look at compensation policies, but this may not be enough. “Who is modeling the behavior at the banks?” asks Salter. “There is the cultural aspect of the business: how do you change that culture short of the firm having a breakdown.”

In the UK, the Committee on Banking Standards proposed a series of sweeping reforms aimed at establishing much great accountability on senior management. Among these would be the “replacement of the statements of principles and the associated codes of practice, which are incomplete and unclear in their application, with a single set of banking standards rules to be drawn up by the regulators. These rules would apply to both senior persons and licensed bank staff and a breach would constitute grounds for enforcement action by the regulators.”

The rules proposed, and which have been embraced by the UK government, are intended to shift the burden of proof of management failure away from the regulator and onto senior management, who will have to “demonstrate that they took all reasonable steps to prevent or offset the effects of a specified failing.” But the new regulatory standards are only UK-specific. International coordination is needed to guard against regulatory arbitrage.

Indeed, what Salter and others see within the industry are ongoing attempts to “game” the system, and legally circumvent many of the regulations that have been piled on since the 2008 crisis. It is this legal gaming, if you will, that remains problematic when envisioning an enhanced risk culture and ethical banking environment. To change that type of behavior requires the type of leadership from the top that we have yet to see, and a regulatory environment that enforces accountability.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus [5]. Compliance Complete provides a single source [6] for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus [7])

[1] New York Times: http://www.nytimes.com/2012/10/07/magazine/ina-drew-jamie-dimon-jpmorgan-chase.html?pagewanted=all&_r=0

[2] UK Parliamentary Committee on Banking Standards: http://www.parliament.uk/documents/banking-commission/Banking-final-report-volume-i.pdf

[3] separate survey: http://www.lse.ac.uk/researchAndExpertise/units/CARR/pdf/Risk-culture-interim-report.pdf

[4] institutional corruption: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2247545&download=yes##

[5] Thomson Reuters Accelus: http://accelus.thomsonreuters.com/

[6] provides a single source: http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/

[7] @GRC_Accelus: https://twitter.com/GRC_Accelus

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