Banking Industry Raises Red Flags: Stricter Capital Requirements May Drive Up Prices

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As regulators consider new rules to protect against any potential losses, U.S. bank executives cautioned on Friday that impending increases in capital requirements would drive up the cost of financial goods and shift activity into less regulated industries.

In order to maintain the stability of the financial system, federal banking regulators are anticipated to propose regulations forcing banks to hold additional cash on hand in the upcoming weeks. Michael Barr, vice chair for supervision at the Federal Reserve, stated last month that major companies need to retain more cash in reserve to protect against unanticipated risks.

Although specific plans have not been disclosed, bank officials have already issued warnings about potential negative effects.

“Higher capital requirements definitely increase the cost of credit, which is bad for the economy,” Jeremy Barnum, chief financial officer of JPMorgan Chase (NYSE:JPM), said during a conference call on Friday following the release of the bank’s second quarter earnings.

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The biggest lender in the country might raise prices or stop offering some products to make up for the higher capital costs, according to Barnum.

One significant upcoming regulation would demand banks to keep greater capital against specific trades. Officials at JPMorgan also informed investors that, as a result, the firm would probably have to discontinue a derivatives product linked to the U.S. Treasury yield curve because it would no longer be profitable.

The regulations may have more severe effects on mortgages, making them “harder to offer the homeowners,” according to JPMorgan officials.

The Basel Committee on banks Supervision adopted new risk-weighted guidelines during the 2008 financial crisis, and the Fed and other banks authorities are getting ready to put them into practise.

Banks are continuing to exercise caution and maintain capital until the rules are more clearly defined.

In a separate post-earnings conference call on Friday, CEO of Citigroup (NYSE:C) Jane Fraser stated that “there is a lot of uncertainty out there about the new capital requirements, both in terms of their nature and the timing of implementation.”

Wells Fargo (NYSE:WFC) CEO Charlie Scharf informed investors on the call that the bank was anticipating rising capital needs and was evaluating the potential impact on stock buybacks.

Washington-based business lobbyists are also fighting back against stricter regulations. Potential capital costs on non-interest revenue, such as fees lenders charge for credit card services or investment banking services, is one particular area of worry.

Executives predicted that business would shift to less strictly regulated financial middlemen, potentially benefiting Blackstone (NYSE:BX) and Apollo, if regulators place more onerous limitations on banks. Both companies’ shares have seen a recent increase in price.

Blackstone and Apollo were unavailable for comment right away.

“This is great news for hedge funds, private equity, private credit — and they’re dancing in the streets,” JPMorgan Chase CEO Jamie Dimon told investors.

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