Two years ago, Jamie Dimon, the CEO of JPMorgan Chase (JPM 0.06%), decided he had had enough of the government's overambitious zeal to regulate the banking industry. "I'm very close to thinking the United States shouldn't be in Basel anymore," Dimon told The Financial Times, referring to the then-newly issued international accord governing bank capital.
"I wouldn't have agreed to rules that are blatantly anti-American," said Dimon.
Fast forward to today, and his bank is now more responsible than any other for some of the most stringent provisions in the soon-to-be-released Volker Rule, which dictates what types of non-banking activities federally insured depository institutions can be engaged in.
At issue is portfolio hedging, which banks use to protect against losses from a broad basket of assets. It was this very activity that JPMorgan Chase claimed to be behind the now-infamous London Whale scandal that cost the nation's largest bank by assets more than $6 billion in losses last year.
As originally written in 2011, and following heavy lobbying from the banking industry, the Volker Rule carved out a wide exception for the practice, saying it would permit "the hedging of risks on a portfolio basis."
But with the intervening London Whale debacle, this loophole has been eliminated. According to The Wall Street Journal, which had a chance to review an updated version of the rule, permissible hedging is now limited to mitigating "one or more identifiable risks."
On top of this, the rule also purportedly requires that chief executive officers guarantee their firms are in compliance with the regulation, much like the Sarbanes-Oxley Act mandated in the aftermath of the corporate scandals in the early 2000s.
The movement in this direction will not hit all banks equally. An analysis by Bloomberg News concluded that the hardest-hit will be Goldman Sachs (GS 1.79%) and Morgan Stanley (MS 0.29%). While both firms have moved away from principal trading (which is the primary target of the Volker Rule), they still generate roughly 30% of their revenues from the activity.
On the other side of the equation, Bank of America (BAC -0.21%) looks to trading for less than 10% of its total revenue. Unlike Goldman Sachs and Morgan Stanley, the Charlotte-based bank has large consumer- and business-oriented operations that account for the rest. And the same can be said of many smaller regional and community banks, which are unlikely to feel much if any impact from the JPMorgan Chase-induced rule change.
