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Dimon: Liquidity rules hindered JPMorgan's ability to lend in repo market

JPMorgan Chase & Co. said liquidity rules constrained its ability to provide funding in short-term money markets when rates spiked in the middle of September.

Contraction in the Federal Reserve's balance sheet and growth in non-reserve liabilities such as currency had been shrinking the supply of reserves — deposits that banks keep with the central bank — for some time when corporate tax payments and an unusually large issuance of Treasury securities produced a liquidity crunch.

On a conference call with analysts to discuss third-quarter earnings, JPMorgan Chairman and CEO Jamie Dimon said the bank typically has about $120 billion in reserves at the start of each day, an amount that usually falls to about $60 billion during the course of the day. Dimon said the company's interpretation of liquidity regulations means it must hold onto those reserves.

"We could not redeploy it into the repo market, which we would have been happy to do," he said. "We need enough in that account such that if there's extreme stress during the course of the day, it doesn't go below zero."

"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," Dimon added.

On a separate call with reporters, CFO Jennifer Piepszak said, "On the margin, it's fair to say we were constrained, given the liquidity framework and requirements that we have to hold a certain amount of cash on a daily basis." She emphasized that the dislocation in September "was not a material event for JPMorgan one way or another."

The Fed has chosen to address the issue by providing emergency liquidity and by buying Treasury bills to expand its balance sheet.

Piepszak said the moves make sense.

"What the Fed has said and what [it has] done in terms of open market operations and their willingness to increase reserves in the system are all the right things to do," she said. "It's important for us to think about a coherent framework across liquidity and capital. But the Fed right now in terms of responding to what happened in the middle of September [is] doing what [it needs] to do."

Dimon said that JPMorgan Chase had been active in the repo market last year when it had more reserves and sought higher returns than what the Fed pays on excess reserves. He added that the bank has not been trying to make a "statement" through its activities in short-term funding markets. Rather, he said, "We simply were trying to meet our regulatory requirements."

Piepszak also praised recent proposals to change stress test and capital rules, including one tweak that would eliminate the requirement that assessments of banks' resilience include the assumption that they would continue to pay dividends at current levels.

Dimon objected to the idea of imposing a countercyclical capital buffer, however. The tool could be used to increase capital requirements when risks are building and lower them during times of distress, and it has been the subject of profound interest among regulators.

"It won't work," Dimon said. "You're not going to be going into major stress — reducing your capital levels. It just isn't going to happen. The whole concept is flawed."