This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Big Bank Bashers See First Unintended Consequences

NEW YORK ( TheStreet) -- The exit from student lending by JPMorgan Chase (JPM - Get Report) is not simply an effort by the largest U.S. bank to "simplify" its business.

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:

The nation's biggest bank holding companies have shown their ability to fully comply with minimum Basel III capital requirements, many years ahead of the full Basel III implementation in January 2019. The big banks for many years have been "managing to" the Basel III requirements, which center on the Tier 1 common equity ratio -- a risk-based ratio.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
BAC $16.34 0.00%
C $53.48 0.00%
DFS $53.73 0.00%
JPM $64.10 0.00%
WFC $53.33 0.00%

Markets

Chart of I:DJI
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASDAQ 4,776.5080 -51.8170 -1.07%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs