CLSA analyst Mike Mayo has frequently argued that big banks should break up and has even pushed JPMorgan Chase ( JPM) to do so. CEO Jamie Dimon has resisted such calls, arguing that a diversified business model offers more value than monoline businesses. The bank has grown bigger since the crisis, even as its competitors have shed assets. Still, JPMorgan's multi-billion dollar trading loss last year has given further fodder for critics and the bank is facing tougher regulatory scrutiny. At the conclusion of the Federal Reserve's recent stress tests, JPMorgan and Goldman Sachs ( GS) were given only a conditional approval for their deployment plans, with the regulator citing weaknesses in their capital planning. The Fed is also using the stress tests to nudge banks into less risky businesses. "JPMorgan Chase, Morgan Stanley and Goldman Sachs, three of the larger capital markets-intensive banks were all dinged in the stress tests," notes Gardner. "Regulators have given a clear guide of what they want to see going forward."
Banks have been reconfiguring their trading and capital markets businesses in anticipation of the Volcker rule, which prohibits proprietary trading and reins in risk-taking activities. They are far from through with their restructuring efforts. "In the next 12-18 months there is going to be a lot of internal pressure at banks. Management is going to have to evaluate what are core parts and what is really superfluous," says Gardner. "It is already happening. It is just happening slowly so you can't see it." -- Written by Shanthi Bharatwaj in New York.