Tuesday, May 10, 2011

Stay Classy, JPMorgan

Oh god, I see that JPMorgan is already resorting to scare-mongering on Basel III’s new Liquidity Coverage Ratio (LCR), which I’ve discussed many times before.

JPMorgan’s corporate treasurer, Joe Bonocore, warned last week:

There will likely be negative market and economic consequences if regulators don’t modify the liquidity rules, he said.
Banks will have to charge more to finance corporate and municipal bonds, which essentially means that market participants will have less incentive to invest in these types of assets if they don’t qualify, Bonocore said. “As a result we believe it’s going to become more expensive for corporations and municipalities to raise financing,” he said.

He said that right now a sizeable portion of J.P. Morgan’s investment portfolio is invested in municipals. “However, if they don’t qualify as part of the liquid asset buffer we’re going to be forced to look for another way to go about our investment portfolio and manage our risk.”
Wait, the LCR is going to hurt muni bonds? You sure you want to stick with that argument, Joe?

The only way the LCR would raise costs for muni bond issuers would be if banks like JPMorgan had been including muni bonds in their liquidity pools — something which, given the generally illiquid nature of muni bonds, I find highly unlikely. JPMorgan already maintains a liquidity pool based on its own internal standards. The LCR is simply codifying this same type of liquidity pool requirement, albeit with significantly (and appropriately) more conservative assumptions. Unless JPMorgan has been including muni bonds in its liquidity pool — which would be prohibited under the LCR — then the LCR should have no real effect on JPMorgan’s muni bond portfolio.

And if for some reason JPMorgan has been including muni bonds in its liquidity pool, then the bank is guilty of extremely poor liquidity management, and the LCR is saving JPMorgan from its own ineptitude. But, of course, there’s no way JPMorgan has been doing this. They’re just trying to bully regulators into weakening Basel III’s liquidity requirements by warning of the dire (!) consequences for those sweet-and-innocent municipalities.

Oh yeah, and Bonocore is also pushing for gold to be eligible for the LCR liquidity pool. Umm....no. Clearly he has a very different idea of what constitutes a “deep” market.

Stay classy, JPMorgan.


Peter said...

Hey Economics of Contempt,

Just found your blog recently and I really enjoy it, it has been a great resource for the legal view of the finance world! Please keep up the great work!

With regards to your comments on the the LCR with respect to JPM, I have to disagree on some points.

I absolutely agree that they should not be counting Muni's as liquidity or anywhere in their liquid asset buffer. If they were my only guess is perhaps they are window eligible (I don't know all the assets that are) so there for they are "liquid" for them in an emergency basis.

Where I disagree is:

If they are funding munis (and corporates as well) with repo financing <30days, the LCR states that they can not rely on that repo being there (makes sense). They may feel that if the repo line was lost, they still could pledge the assets to the window and therefor count in their stock of high quality assets.

LCR won't give them credit for borrowing for the window so they must as a result backstop some / all of their secure financing with cash.

As a result, they are no longer just funding the haircut, thus introducing a "new" cost (they should have been doing this since 2008, but whatever).

So overall I agree with JPM, but their reasoning is wrong.

If you think I am off base on any of this please let me know, but it is my understanding of the rules and how they may be funding their b/s. I look forward to hearing your response.

Thanks again.

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