While "needs improvement" may not sound that bad, it is a very big deal to the management of any bank. And now it is a stigma for JPMorgan Chase, which earned $74.963 billion over the five-year period ended Dec. 31, compared to $13.68 billion for Bank of America and a net loss of $80 million for Citigroup, over the same period, according to data provided by
Thomson Reuters Bank Insight
. During that time, JPMorgan managed to integrate Bear Stearns and the failed Washington Mutual, which it purchased from the
Federal Deposit Insurance Corp.
in September 2008, with the FDIC's insurance fund not losing a dime.
It seems quite a stretch to lump JPMorgan Chase with crisis-period Citigroup and Bank of America, but this is what the regulators did, following the London Whale losses. The OCC examiners obviously failed either to detect or to act upon the outsized risks being taken by the CIO. According to the Senate committee report, "several OCC examiners were responsible for overseeing the CIO."
While investors seem to be shrugging off the report of JPMorgan's regulatory downgrade, some industry observers think it is serious business.
A CAMELS 3 rating "is unacceptable for the largest bank in the nation, the largest derivatives dealer and the largest trader in the credit derivatives market", according to Mark Williams, a former Federal Reserve bank examiner and current lecturer at the Boston University School of Management.
Williams in an email on Wednesday said "it is highly unusual that a bank's regulatory CAMELS score is released publicly. Typically regulatory ratings are confidential and only shared with senior bank management. The concern is that publicly disclosing this information could trigger a bank run."
Over the long haul, investors could pay a price for the regulatory downgrade, according to Williams, who said that having the management component of the CAMELS rating also scored a 3 "indicates that this is a clear mismatch between level of bank risk taking and level of management quality," and that it could take several years for the OCC to upgrade the rating.
There is a risk "that regulators will not upgrade the bank for several years to come," he said, meaning the bank will "spend more time satisfying regulator concerns and will have less time to focus on expanding its banking activities," he wrote.
-- Written by Philip van Doorn in Jupiter, Fla.