In the fight to put risk-limiting regulations on banks, Mark Carney has a big name in his corner: Eric Sprott.
After Mr. Carney ended up in a well-publicized argument with JP Morgan Chase chief executive officer Jamie Dimon about whether regulators are on the right track, Mr. Sprott wrote an open letter to The Globe and Mail backing Mr. Carney.
Mr. Dimon is fighting against rules that would force huge banks like JP Morgan to hold more capital to reduce leverage, while Mr. Carney is a firm advocate of the plans. The disagreement apparently boiled over at a meeting last week where both were present, and tales of the argument landed in the headlines.
Mr. Sprott, long a critic of leverage as a destabilizing factor for banks, sided firmly with Mr. Carney.
"In our opinion, the current economic crisis is still, at its heart, a banking crisis," he wrote. "Mr. Dimon's alleged criticism reflects his inability to acknowledge this. Banking regulation is a wholly crucial issue and we stand behind Mr. Carney's attempts to address it."
For the full text of the letter, addressed to Globe and Mail editor-in-chief John Stackhouse, read on.
Re: Bankers, regulators square off amid turmoil
I wish to express my firm support for Mark Carney's recent financial regulation speech in Washington. Despite Mr. Dimon's alleged criticism of Mr. Carney's remarks, the fact remains that we would not be in the present situation today were it not for the excessive overleverage and flagrant misappropriation of capital undertaken by the world's largest banking corporations.
It has been our view for many years that the world's largest banks are operating with leverage ratios of over 20-to-1. We are now in an environment where all financial assets, including currencies, can change 5-10% in a single week (many change by that percentage in a single day – see the Swiss Franc's 9.5% depreciation against the US dollar on September 6th, 2011). With volatility of that magnitude, the practice of maintaining such leverage is not only imprudent, it is irresponsible.
We have long maintained that all banks should make stronger efforts to bolster their capital reserves. It should not be the responsibility of government to rescue these corporations if they continue to make the same mistakes, and engage in the same risks, year after year. In that vein, we must also question why banks were allowed to reinstate their dividends so quickly after the 2008 crisis. In France, for example, where French banks are currently experiencing deposit withdrawals, one wonders how much stronger they would be today had they initiated a more prudent recapitalization policy.
In our opinion, the current economic crisis is still, at its heart, a banking crisis. Mr. Dimon's alleged criticism reflects his inability to acknowledge this. Banking regulation is a wholly crucial issue and we stand behind Mr. Carney's attempts to address it.
Eric Sprott, FCA
Sprott Asset Management LP
200 Bay Street, Suite 2700