Dimon Says Regulation Limited JPMorgan From Calming Repo Market
JPMorgan Felt Barred From Calming Repo Market by Regulations
(Bloomberg) -- JPMorgan Chase & Co. had the cash and willingness to calm short-term funding markets when they went haywire in mid-September, but the banking giant said regulations held it back.
The firm has what Chief Executive Officer Jamie Dimon on Tuesday called a checking account at the Federal Reserve. When rates on repurchase agreements spiked to around 10% a month ago -- roughly four times more than what JPMorgan earns at the Fed -- the bank could’ve profited by shifting the money into repo.
It didn’t. The bank, Dimon told analysts following JPMorgan’s third-quarter earnings release, needed to keep that money put so it could fulfill its liquidity requirements mandated by regulators.
“We could not redeploy it into the repo market. We’d have been happy to do it,” Dimon said Tuesday. “It’s up to the regulators to decide if they want to recalibrate the kind of liquidity they expect us to keep in that account.”
A spokesman for the Fed declined to comment on Dimon’s remarks. Chairman Jerome Powell said Sept. 18 that the central bank doesn’t believe its liquidity demands are improperly calibrated. He said it’s “not impossible” the central bank could change its mind at some point, “but that’s not something that we think right now.”
September’s experience showed the Fed that it can’t rely on the largest institutions to help out the next time cash dries up in the multi-trillion-dollar repo market that is the lifeblood of the financial system.
JPMorgan responded very differently when rates jumped in late December. Back then, the bank deployed excess cash to the repo market when rates surged above 6% as other lenders retreated as a way of tidying up their balance sheets for regulatory purposes. JPMorgan drew down its deposits with the Fed and increased its allocations to the repo market by more than $100 billion, according to its fourth-quarter earnings statement.
“Last year, we had more cash than needed for regulatory requirements,” Dimon said. So shifting into repo “obviously made sense, you make more money,” the CEO added.
To get the market back under control, a month ago the Fed began daily liquidity injections into repo as market forces alone weren’t able to right the ship. Repo rates have since returned to more normal levels, but the Fed has acknowledged that it needs a more permanent solution than these ad-hoc operations.
Last week, the central bank announced it will buy $60 billion of Treasury bills a month. The move came sooner and at a larger scale than many expected, and was welcomed as a way to keep benchmark rates under control in the long-term.
“We have to get used to the Fed’s presence in the repo market for a while,” said Priya Misra, head of rates strategy at TD Securities. “I don’t think we’ll be at adequate reserves at least until the second quarter of next year.”
--With assistance from Michelle F. Davis and Jesse Hamilton.
To contact the reporters on this story: Emily Barrett in New York at ebarrett25@bloomberg.net;Alexandra Harris in New York at aharris48@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Nick Baker
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