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JPMorgan Chase CFO Discusses Potential Impact of Higher Capital Ratios

Raising Prices or Exiting Certain Areas

JPMorgan Chase's CFO, Jeremy Barnum, has stated that if capital ratios increase as proposed, the bank would first raise prices on loans and other products before considering exiting certain areas entirely. The bank would attempt to reprice and assess the success of the strategy. However, if repricing proves unsuccessful, JPMorgan Chase may be forced to remix its offerings and potentially exit certain products and services altogether. This could lead to these products and services moving outside of the regulated perimeter.

Lessons from the 2008 Financial Crisis

Following the 2008 financial crisis, banks were required to implement stricter rules, leading to a pullback from activities such as mortgages and student loans. As a result, private equity players like Blackstone and Apollo have stepped in to fill the gap, providing funding for acquisitions and large loans. This has contributed to the growth of the non-bank sector, also known as the "shadow banking" industry. Concerns have been raised regarding the lower level of federal scrutiny faced by these non-bank players compared to traditional banks.

Increased Pricing Power

JPMorgan Chase's CFO acknowledges the possibility of increased pricing power due to higher capital requirements. The bank would aim to generate the appropriate return for shareholders by repricing its products and services. However, the success of this strategy remains uncertain. If repricing does not yield the desired results, JPMorgan Chase may have to make the difficult decision of exiting certain business areas and allowing them to move elsewhere, potentially outside of the regulated perimeter. This demonstrates the complex balance that banks must strike between profitability and regulatory compliance.

Potential Impact on New Businesses

The discussion surrounding higher capital ratios and the potential impact on JPMorgan Chase raises important considerations for new businesses in the financial industry. If capital requirements increase as proposed, it is likely that banks will first attempt to reprice their products and services before considering more drastic measures. This could have implications for new businesses seeking to enter the market.

One potential outcome is the increased pricing power that banks may have due to higher capital requirements. If JPMorgan Chase's repricing strategy proves successful, it may set a precedent for other banks to follow suit. This could lead to a more competitive landscape where new businesses may struggle to offer competitive pricing and attract customers.

Alternatively, if repricing efforts are unsuccessful, banks like JPMorgan Chase may be forced to exit certain business areas altogether. This could create opportunities for new businesses to fill the gap left behind, particularly in areas that move outside of the regulated perimeter. However, entering these areas might come with its own set of challenges, as regulatory scrutiny on non-bank players is relatively lower compared to traditional banks.

In conclusion, a higher capital ratio environment could present both challenges and opportunities for new businesses in the financial industry. While the potential for increased pricing power by established banks may pose obstacles, there might also be room for innovative newcomers to capitalize on areas left vacant by exiting banks. Adapting to the changing regulatory landscape, maintaining a competitive edge, and identifying niches in the market will be essential for new businesses navigating this evolving environment.

Article First Published at: https://www.cnbc.com/2023/07/14/dimon-apollo-blackstone-tougher-bank-rules.html

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