In the depth of the financial crisis, the Federal Reserve encouraged JPMorgan to adopt failed banks, but now the Fed may try to split them up again, according to CNBC. The whole debate of whether JPMorgan is too big and needs to be shrunk has been revived as the Fed said JPMorgan had to hold 12% of capital as a buffer against the breakdown that caused the financial crisis. This capital requirement is bigger than that for other banks, and those critical of JPMorgan’s size may call for the bank to be split into two to four pieces. Others say a move will be good for the bank because it will unlock shareholder value.
Goldman Sachs analyst Richard Ramsden said “Size is now a regulator negative, ” and thinks JPMorgan might be a “victim of its own success.” The irony is JPMorgan is so large because it took over Chase in 2001, but was also required to pick up banks felled in the crisis, such as Bear Stearns and Washington Mutual, a move encouraged by the Fed. The bank showed strong revenues last year, but it was up just 7% compared to a 11.4% for the S&P 500, and well behind many of its peers, which returned double digits.
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Ramsden thinks that breaking up JPMorgan may be painful because of the “execution risk, ” and the move may be labor intensive, given the size of each segment. Analyst Christopher Whalen sees a 1 in 3 chance of JP Morgan breaking up and thinks it will be done through a more gentle manner, like selling off assets.