JPMorgan is rewriting financial laws — with a little help

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Jamie Dimon doesn't like the claim that JPMorgan is “dominant,” an analyst noted on the US megabank's conference call on Friday. How could that be, with more than 4,000 lenders in the US and a plethora of hungry fintechs? But in some ways, JPMorgan's high profits show that the regular rules of competition no longer apply in banking.

Take the bank's huge consumer division. In the last quarter, a return on equity of 29 percent was achieved. Let's assume that the cost of equity – the minimum required by investors – is 10 percent and that the bank achieves impressive, above-average returns. If JPMorgan had just overcome this hurdle over the last decade, its retail bank would have generated around $50 billion in cumulative revenue. As it stands, it made $90 billion more.

Extraordinary returns tend to be ignored, textbooks say – and if not, that can indicate a market problem. However, there are a few reasons why JPMorgan defies gravity. The costs of establishing a rival bank with national reach are prohibitively high. The credit cards JPMorgan sells rely on a wealth of historical data and insights into customers' habits. Goldman Sachs is a competitor that tried to build this from the ground up but failed.

Technology has tightened the playing field even further. With the pandemic accelerating customer adoption of all things digital, the biggest lenders are shoveling tens of billions of dollars into faster payments, artificial intelligence and better customer experiences. JPMorgan spends $17 billion a year on technology. Few can compete: There are only nine U.S. banks whose total operating costs are this high, according to LSEG data.

Customer inertia also helps. Dimon said Friday that “deposit betas” were lower than the bank indicated. In plain language, this means that account holders were content with lower returns on their savings than one might expect given the trend in interest rates.

What's undoing this loot is the same regulatory bureaucracy that drives bankers to distraction. Bank executives continue to grumble about the new capital rules the Federal Reserve plans to impose, even though they have already been weakened. The reality, however, is that such rules, when drafted sensibly, create a protective moat around the largest lenders. The more strictly they are regulated, the more trust customers have.

Not all major banks are equally lucky. Applying the 10 percent return on equity hurdle to JPMorgan's rival Citigroup over the last decade leaves actual returns short by more than $60 billion. That suggests Dimon's steady hand had a significant impact on JPMorgan's superior returns. And that by destroying shareholder value year after year, Citi is also distorting the norms of capitalism in its own way.

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