How should JP Morgan address the new capital requirements of the Dodd Frank Act? 

JPMORGAN AND THE DODD-FRANK ACT Jamie Dimon, CEO of JPMorgan Chase & Co., sat in his office preparing for the company’s 2010 Q3 earnings conference call on October 13 and wondering how to address the inevitable questions related to financial reform. It had been just over two months since the Dodd-Frank Financial Reform and Consumer Protection Act (Dodd-Frank Act) had been passed, and there was still much uncertainty as to how JPMorgan should address the reforms. JPMorgan had reported stronger than expected EPS in the third quarter, but analysts were more concerned about what strategic initiatives Dimon would implement in response to the Dodd-Frank Act. The act had introduced wide-ranging and industry-changing reforms that were aimed primarily at fully integrated financial institutions such as JP Morgan. While most of the rulemaking would be forthcoming from regulatory authorities, Dimon knew it would be best to address these issues immediately to protect shareholders by avoiding uncertainty.

New Capital Requirements of DODD FRANK ACT

The costliest elements of financial reform were likely the resultant regulatory capital requirements. While not specifically spelled out in the act, regulators needed to install more stringent capital requirements as a result of the legislation. These new requirements forced banks to hold more loss-absorbing equity against their assets to protect against future losses. Additionally, Congress required regulators to establish standards that were countercyclical.

Essentially, Congress wanted capital standards that were more stringent during times of economic expansion to curb unrestrained growth but were also more relaxed during downturns to encourage continued economic activity. There was still much uncertainty, however, as to what level of capital would be considered adequate during times of expansion.

Another issue raised in establishing new prudential standards was that of liquidity. During the crisis several financial firms, although adequately capitalized, were on the brink of collapse because they lacked enough liquidity to satisfy redemptions by short-term creditors. Liquidity referred to the cash that banks have available to pay off creditors while bank capital was the equity that was used to absorb losses but was not necessarily cash. While the Dodd- Frank Act did not specifically require regulatory action with respect to liquidity, discussions at the most recent Basel Convention indicated that liquidity standards could be forthcoming in the near future.

Answer rating: 100% (QA)

The DoddFrank Act which was passed in 2010 put new capital requirements into place for banks and other financial institutions The goal of these requirements is to ensure that these institutions have e... View the full answer