Banks such as JPMorgan present their positions in a way that is essentially inscrutable

Goldman Sachs caused a bit of a stir this week by issuing an analysts’ report suggesting JPMorgan Chase might want to break itself up. I believe in the independence of investment bank research as much as the next person, but it is hard not to notice that the major beneficiary of such a step would be Goldman Sachs.

That is not to say it is a bad idea. In fact, it may be a very good idea, possibly for JPMorgan’s shareholders, and definitely for society as a whole. It also suggests that the world’s banking regulators are steadily coming around to the idea of dismantling the largest banks with their own tools rather than relying on governments to do the right thing. If so, jolly good luck to them.

Goldman’s analysts did not have the idea of running the numbers on a JPMorgan break-up on their own. They were given a prod by the US Federal Reserve, which last month unveiled its plan for higher capital ratios for the eight US banks that figure among the 29 “global systemically important banks”. They are the financial institutions that regulators could least afford to let fail chaotically in any crisis.

Top of the US list is JPMorgan, which is not only the biggest and most diverse US bank, with $2.4tn in assets and operations in many countries, ranging from credit cards to credit derivatives, but is inconveniently successful across the board. Unlike many rivals, such as Barclays, there has been no reason for it to spin off its investment bank or slim down by other means.

The Fed has now stepped forward and provided one, with a suggestion that if this does not suffice, it may raise the stakes further. Jamie Dimon, JPMorgan’s sometimes emotional chief executive, gave a sweet insight into his psyche in his last letter to shareholders. “It is in our nature to worry more about the downside than to guess at the upside,” he wrote. Well, here is something more for him to fret about.

The Fed’s variation on the capital standards agreed by global banking regulators in Basel is to force the largest, most complex, and potentially most fragile US banks to hold a lot more capital. JPMorgan is $22bn short of the Fed’s fresh target for 2019, which is “a pretty impressive shortfall”, as Stanley Fischer, the Fed’s vice-chairman, noted last month.

The stated reason for the new capital standards is to promote financial stability, which nobody would argue with — not even most bankers. It is abundantly clear that banks had too little capital entering the 2008 crisis, and much of what they declared was too flimsy to be of real help. For banks’ capital ratios, the only way has been up.

But the Fed hints at a second motive, which is to make it so onerous and expensive for large and complex banks to operate that they will decide to break themselves up into smaller — and easier to supervise — operations. Daniel Tarullo, the Fed governor in charge of banking regulation, told a Senate committee in September that its capital proposal “might also create incentives for them to reduce their systemic footprint and risk profile”.

Mr Tarullo phrased that carefully since the US did not actually reintroduce the Glass-Steagall Act divide between commercial banking and securities underwriting after the 2008 crisis. The closest it got to a structural remedy in the Dodd-Frank Act was the Volcker rule curbing bank proprietary trading. A Republican Congress, already chafing at some provisions of Dodd-Frank, would not look kindly on the Fed in effect overruling it.

Regulators could probably achieve the same end without recourse to law. If the US, and countries such as Switzerland, Sweden and the Netherlands that have supersized the capital requirements for very large banks, wish to prise them apart, they simply have to keep ratcheting up the costs of size.

They would need to make life a lot tougher for systemically important banks because, as Mr Dimon proudly — and tactlessly under the circumstances — keeps pointing out in his annual letters, JPMorgan gains a lot from being large. It sells various products to the same customers, reaping $6bn in profits each year; it diversifies its revenues; and it can borrow money cheaper.

The Fed agrees with him. “We think those competitive advantages [of being a systemically important bank] are pretty significant,” one Fed official said as it unveiled its new plan. It thinks the right way to level competition between the largest banks and others is to make the former carry more weight, like the fastest racehorses.

Mr Dimon says what is good for his shareholders is good for society — that JPMorgan’s size makes it more stable and less likely to fail. Perhaps so, but the biggest banks are also hardest for regulators to understand, supervise, and tackle if the worst happens, as the failure of Royal Bank of Scotland showed. That problem will deepen if the economies of scale are allowed to flourish.

According to Goldman, the Fed is handicapping JPMorgan accurately. Its analysts say splitting up JPMorgan’s commercial and investment banks, might reduce the level of capital the pair require sufficiently for the parts to be valued more highly than the whole. It is, however, still a close call.

The Fed will this year consider raising the capital penalties for being big and complex even further. I suggest it does. Mr Dimon would worry more, but the rest of us would sleep easier.

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