06/16/2011 11:11 am ET Updated Aug 16, 2011

JPMorgan Chase Challenges Capital Requirements As Regulators Prepare Basel Rules

Executives at JPMorgan Chase aren't happy about the prospect of the government telling them how much money they must hold over for a rainy day.

The Federal Reserve is considering increasing the amount of solid capital that the largest banks must hold against losses, a measure proposed by international regulators. When banks are required to hold a higher portion of their financing as capital reserves, it reduces their relative amount of borrowing and gives them a stronger buffer, regulators say, making the financial system safer by discouraging risk and bolstering a bank's defenses.

But this extra requirement for the largest banks will hinder these institutions' ability to make loans and compete internationally, said JPMorgan chief risk officer Barry Zubrow, in prepared remarks for a Congressional hearing Thursday.

Nearly three years after the worst financial crisis since the Great Depression, a debate rages about how best to mitigate the next crisis, while still allowing banks to perform their role in financing to the broader economy. Zubrow's comments echo a sentiment expressed across the banking industry for months: that hindering the ability of banks to take risks hurts their ability to extend loans. In JPMorgan's case, the current requirements are sufficient, Zubrow said, and the bank's performance during the financial crisis should be enough proof.

"The regulatory pendulum clearly has now begun to swing to a point that risks hobbling our financial system and our economic growth," Zubrow said in his prepared testimony.

JPMorgan has been a vocal skeptic of new regulations. The firm's chief executive Jamie Dimon asked a pointed question of Federal Reserve Chair Ben Bernanke last week, expressing a fear that the host of new rules will critically hamper the financial sector. Bernanke conceded that he wasn't aware of any research that could allay Dimon's concern.

Capital, which includes the money invested by shareholders, refers to the portion of an institution's financing that it holds in solid reserves. JPMorgan held 7 percent of its financing as capital during the crisis, Zubrow said, and that served the institution well. Increasing that requirement would decrease the amount of money banks have to lend to businesses in the broader economy, goes the argument of the banking industry.

"Too little medicine may make you sicker, too much medicine and you may die as a result," reads a recent post on the U.S. Chamber of Commerce's website.

But regulators say otherwise.

"I'm very skeptical of those arguments," said Federal Deposit Insurance Corporation Chair Sheila Bair, according to the Wall Street Journal. "The problem with lending now has nothing to do with capital. It's combined risk aversion on the part of banks and customer demand."

Increasing capital requirements, further, might actually be in the best interest of a bank's owners, the shareholders. These rules could make a bank's equity less risky, said Anat Admati, a finance professor at Stanford, in a letter to JPMorgan posted on Reuters. Admati, who says she is a JPMorgan shareholder through mutual funds, continues:

Requiring banks to operate with much-reduced leverage, using significantly more equity to fund their investments even beyond currently proposed regulation, is likely the most straightforward and cost-effective approach to improving the health and stability of the financial system and preventing future crises. It must be the key ingredient in any meaningful financial reform and can reduce the need for other, more costly measures. This would greatly benefit the economy and JPM.