DealBook: Wall Street Frets Over New Rules

Brendan Smialowski/Bloomberg NewsBarry Zubrow of JPMorgan Chase.

Wall Street is stepping up its attacks on new financial regulation, warning Congress on Thursday that a wave of restrictions threatens to weaken big banks and the broader United States economy.

“The regulatory pendulum clearly has now begun to swing to a point that risks hobbling our financial system and our economic growth,” Barry Zubrow, JPMorgan Chase’s chief risk officer, said in prepared testimony before the House Financial Services Committee.

The concerns center on the Dodd-Frank Act, the financial regulatory overhaul that has emerged as the scorn of Wall Street. Enacted in the wake of the financial crisis, the law reforms some of the industry’s biggest profit centers, including derivatives trading and debit card fees.

JPMorgan Chase, Morgan Stanley and other financial titans are positioning themselves as victims of the law, amid rising fears that it will enable big European banks to poach their business. Foreign regulators, the banks complain, have a lighter touch than Washington policymakers.

“U.S. regulations that are being implemented on a unilateral basis are threatening the competitiveness of the U.S. markets,” Timothy Ryan, president and chief executive of the Securities Industry and Financial Markets Association, told the committee.

The banks in particular loathe the thought of tougher capital requirements. Under Dodd-Frank, a council of regulators must designate the financial firms — including mutual funds, private equity shops and hedge funds — that pose a systemic risk to the financial system. These firms, and banks like JPMorgan that have more than $50 billion in assets, will face higher capital requirements.

JPMorgan and its fellow Wall Street firms object to the additional layer of capital, calling it a “surcharge.” The banks note that the Basel Committee on Banking Supervision already is enforcing its own international capital requirements. The so-called Basel III rules require JPMorgan to hold 45 percent more capital than it had stored away during the crisis, according to Mr. Zubrow.

“Considering a capital surcharge above Basel III levels that does not adequately account for the changes that have been made,” he said.

Banks also predict a grim future for their derivatives business, an industry at the center of the financial crisis.

Dodd-Frank requires many derivatives contracts to be traded on regulated exchanges and run through clearinghouses, which act as a backstop in case one party defaults. Dodd-Frank, banks say, could push derivatives business and profits overseas as the rules do not match up with foreign regulations.

“It could put U.S. markets at a serious competitive disadvantage,” Stephen O’Connor, a top Morgan Stanley derivatives official and chairman of the International Swaps and Derivatives Association, said in prepared testimony on behalf of the association.

The Commodity Futures Trading Commission and the Securities Exchange Commission, charged with writing the new rules, recently delayed their implementation plan. But they still plan to finalize the regulations later this year, while international regulators plan to wait until the end of 2012.

The European Commission, the European Union’s executive body, has discussed similar rules, but the regulators may take until 2012 or later to complete the overhaul.

Gary Gensler, chairman of the trading commission, said his agency was “actively coordinating with international regulators to promote robust and consistent standards.”

Until the European rules are completed, banks in the United States say they will have to collect margin from pension funds and other investors looking to enter a derivatives deal. But a European bank booking a deal out of, say, London or Frankfurt would not have to collect any upfront collateral payments, giving them a competitive edge.

The “draconian” margin requirements could “effectively end” Wall Street’s overseas derivatives business,” Mr. Zubrow said.

Mr. Gensler noted, however, that new regulations were needed to rein in the derivatives markets.

“Though two years have passed, we cannot forget that the 2008 financial crisis was very real,” he told the committee.

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