A showdown between Jamie Dimon and Mark Carney has put a spotlight on the titanic struggle between bankers and policy makers over reshaping global financial regulation, highlighting a state of play few would have predicted: With the match almost over, it's the governments that are winning.
Mr. Dimon, the head of JPMorgan Chase & Co. and a vocal critic of plans to force the world's biggest banks to retain extra capital, directed a tirade at Mr. Carney, the Governor of the Bank of Canada, during a private gathering in Washington last Friday.
The confrontation occurred in front of a group of about 30 bankers, who assembled at the National Archives to meet with Mr. Carney, a key figure in efforts by the Group of 20 major economies to overhaul an international regulatory regime that was exposed as weak by the financial crisis.
Tensions are high because it is crunch time for the regulatory overhaul that G20 leaders pledged to deliver two years ago at their summit in Pittsburgh. Academic experts have warned ever since that the more time that passes, the harder it will be to muster political enthusiasm for such technical reforms. To some degree, that has happened. But more impressive is the number of jurisdictions that are showing resolve to press ahead. Switzerland, Britain and Australia all are promising to implement rules that exceed the minimum global standard.
Included among the bankers was Bank of Nova Scotia chief executive officer Rick Waugh, who was in the U.S. capital to attend meetings of the Institute of International Finance. Mr. Waugh witnessed his countryman absorb a torrent so aggressive that Goldman Sachs Group Inc. CEO Lloyd Blankfein felt the need to try to smooth things over with Mr. Carney, a former Goldman Sachs investment banker, by e-mail.
A spokesman for the Financial Services Forum, which organized the gathering, declined to comment. Both JPMorgan and Bank of Nova Scotia declined to comment.
The central point of Mr. Dimon's attack was the G20's intent to require a few dozen lenders whose failure would threaten the financial system to hold reserves at levels 2.5 percentage points higher than other banks, a measure inspired by the economic destruction caused by the collapse of Lehman Brothers Holdings Inc. in 2008.
JPMorgan, the second biggest U.S. bank after Bank of America, is on the G20's potential hit list.
"This is the main challenge, that these guys keep pushing, and the regulators weaken," said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington. "That would be terrible."
Mr. Carney stood his ground, countering Mr. Dimon's critique that the planned measures are "anti-American" and risk hurting economic growth with a similarly passionate defence of the G20's efforts to construct a regulatory regime that will significantly reduce the risk of another global financial crisis, according to a person familiar with what transpired at the gathering.
On Monday, after The Financial Times published an account of the clash on its front page, Mr. Dimon phoned Mr. Carney to clear the air, according to another person, who is associated with the JPMorgan chief. Mr. Carney returned Mr. Dimon's call, and the two men had what this person described as a "constructive" conversation about the broad debate over financial regulation.
The Basel Committee of central banks and financial regulators is set to meet Tuesday and Wednesday to finalize its recommendation on a surcharge for the biggest banks, which are commonly referred to as those institutions that are "too big to fail." G20 finance ministers and central bank governors will meet to consider this and other plans at a meeting in Paris in a few weeks ahead of a summit of leaders in Cannes in November.
"At the Basel Committee, where a lot of the rule making takes place, I see still an ability to reach consensus and to sing from the same hymn book," Julie Dickson, Canada's top banking regulator, said in Toronto Monday.
From the outset, academic experts warned that history shows that the bank lobby will attempt to water down new rule changes. They called on officials to act quickly, saying that as memories of the crisis fade, so will the energy to write new rules. "The longer we are from the 2008 crisis, the larger the resistance there is to reform," said Eric Helleiner, who studies financial regulation at the Waterloo, Ont.-based Centre for International Governance Innovation.
Mr. Helleiner said the G20 "principles" are right, but he's critical of the execution. Financial institutions will get a decade to comply with tougher standards, a window that Mr. Helleiner says is too generous. Mr. Goldstein also said that banks are being given too long to build up their capital buffers, but was less critical of the G20's overall performance. "I give them a B or so," Mr. Goldstein said. "It's better than what we had before."
What's at stake
A look at some of the proposed new regulations:
The G-SIFI surcharge
Regulators want to impose a capital surcharge on global systemically-important financial institutions (G-SIFIs – essentially, the largest and most interconnected banks). The idea is that a collapse of one of these banks would be more disruptive to the world economy than the failure of a smaller bank, so G-SIFIs should have to be more cautious. The surcharge would require G-SIFIs capital levels to be up to 2.5 percentage points higher than smaller banks.
Tougher capital rules
Under the Basel III reforms (that is, capital requirements that regulators plan to phase in by 2019), banks will have to maintain capital levels that equal at least 7 per cent of their risk-bearing assets. Banks in Canada and a number of other countries already meet this test. But regulators are also changing the rules outlining what kinds of capital would qualify, in an effort to bolster the quality of financial institutions' capital cushions.
Liquidity coverage ratio
This rule, also being contemplated as part of Basel III, would force banks to hold enough highly liquid assets to be able to get through a 30-day run on their funding. Banks vehemently oppose this measure, saying it would force them to cut back the amount they lend to customers.
The Group of 20 has called for over-the-counter derivatives to be cleared through central counterparties, rather than bilaterally, to reduce the amount of counterparty exposure that banks are subject to. When derivatives are cleared and settled bilaterally, banks take the risk that the counterparty they are dealing may not be able to meet its financial commitments.