It's an unintended consequence of new capital rules proposed in July to "reduce the likelihood of economic disruptions caused by problems" at the nation's largest banks. Ironically, the new capital rules are forcing the biggest banks to shy away from less risky and lower-margin businesses like student loans. That will make the big bank more risky overall, while also enhancing returns to investors, as the banks focus on higher-margin areas of business.
The Wall Street Journal on Friday reported that JPMorgan in October would stop making student loans to its customers; the bank had already stopped making student loans to noncustomers last year. According to the report, the bank is seeking to "simplify its operations amid heightened scrutiny from regulators," in the wake of the "London Whale" hedge trading losses, which in 2012 amounted to at least $6.2 billion before taxes.
But there is another major reason for JPMorgan to exit student lending and other low-risk, low-margin businesses the company was historically happy to participate in: Under regulators' proposed leverage capital rules, the largest banks will have the same capital requirement for a safe asset, like cash for example, as they will for junk bonds or risky noncollateralized loans, such as credit card loans.Federal Regulators' proposal of new leverage capital requirements for the nation's banks on July 9 -- which came only one week after the Federal Reserve finalized its rules to implement the Basel III capital requirements -- raised required leverage capital ratios for bank subsidiaries of U.S. bank holding companies with total assets of at least $700 billion, as well as those with at least $10 trillion in assets under custody. In addition to JPMorgan, the new rules affect the following bank holding companies:
- Bank of America (BAC - Get Report)
- Citigroup (C - Get Report)
- Wells Fargo (WFC - Get Report)
- Goldman Sachs (GS)
- Morgan Stanley (MS)
- State Street (STT)
- Bank of New York Mellon (BK)
Check Out Our Best Services for Investors
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts