JPMorgan Chase CEO and Chairman Jamie Dimon gestures as he speaks during the U.S. Senate Banking, Housing and Urban Affairs Committee’s oversight of Wall Street firms on Capitol Hill in Washington, DC on December 6, 2023 .
Evelyn Hockstein | Reuters
It was buried in a quarter of about 200 pages archiving from JPMorgan Chase Last month were eight words that underscore just how contentious the bank’s relationship with the government has become.
The lender revealed that the Consumer Financial Protection Bureau could punish JPMorgan for its role in Zelle, the giant peer-to-peer digital payments network. The bank is accused of failing to block criminal accounts from its platform and failing to compensate some fraud victims, according to people who spoke on condition of anonymity because of an ongoing investigation.
In response, JPMorgan issued a thinly veiled threat: “The company is evaluating next steps, including litigation.”
The prospect of a bank suing its regulator would have been unheard of in an earlier era, policy experts say, largely because companies used to fear challenging their supervisors. That was especially true for the U.S. banking industry, which needed hundreds of billions of dollars in taxpayer bailouts to survive after irresponsible lending and trading practices that triggered the 2008 financial crisis, these experts say.
However, a combination of factors in the intervening years has created an environment where banks and their regulators have never been further apart.
Trade groups say that in the wake of the financial crisis, banks have become easy targets for populist attacks by Democratic-led regulators. Those on the side of regulators point out that banks and lobbyists are increasingly relying on them courts in Republican-dominated areas to fend off reform and protect billions of dollars in fees at the expense of consumers.
“If you go back 15 or 20 years, the view was that it’s not very smart to compete with your regulator, that to claim all these things is just kicking the hornet’s nest,” he said. Tobin Marcushead of US policy at Wolfe Research.
βThe difference between how ambitious [President Joe] Biden’s regulators have been, and how conservative the courts are, at least a subset of the courts, is historically broad,” Marcus said. “That created so many opportunities for successful litigation against regulatory proposals.”
Late attack
These forces collided this year, which began as one of the most significant for banking regulation since the post-2008 reforms that curbed risk-taking on Wall Street, introduced annual stress tests, and created the industry’s main competitor, the CFPB.
In the final months of the Biden administration, efforts by half a dozen government agencies aimed to reduce fees on late credit card payments, debit transactions and overdrafts, among other proposals. The industry’s biggest threat was Basel Endgame, a sweeping plan to force big banks to hold tens of billions of dollars more in capital for activities like trading and lending.
“The industry faces an onslaught of regulatory and potential legislative changes.” Lake Mariannahead of JPMorgan’s consumer bank, warned investors in May.
JPMorgan’s disclosure of the CFPB investigation into Zelle comes after years grilling by Democratic lawmakers on financial crimes on the platform. Zelle was launched in 2017 by a bank-owned company with the name Early warning services in response to the threat from peer-to-peer networks including PayPal.
The vast majority of Zelle’s business is smooth sailing. of the $806 billion that leaked through the network last year, only $166 million in transactions were challenged as fraud by JPMorgan clients; Bank of America and Wells Fargothe three biggest players on the platform.
But the three banks collectively reimbursed just 38% of those claims, according to a July Senate report which reviewed questionable unauthorized transactions.
Banks are usually prepared to reimburse fraudulent Zelle payments that the customer did not authorize, but usually do not refund damages if the customer is tricked into authorizing the payment by a fraudster; according to in the Electronic Funds Transfer Act.
JPMorgan Payments Executive he said lawmakers in July that the bank actually reimburses 100 percent of unauthorized transactions; The discrepancy in the Senate report’s findings is because bank staff often believe that customers have authorized transactions.
Amid the audit, the bank began warning Zelle users on the Chase app to “Stay safe from fraud” and added disclosures that customers likely won’t be refunded for fraudulent transactions.
JPMorgan declined to comment for this article.
Dimon ahead
The company, which has grown to become the largest and most profitable US bank in history under CEO Jamie Dimon has been at the forefront of several other skirmishes with regulators.
Thanks to his reputation for guiding JPMorgan through the 2008 crisis and last year’s regional banking turmoil, Dimon may be one of the few CEOs in a position to openly criticize regulators. That was highlighted this year when Dimon led a campaign, both public and behind closed doorsto weaken the Basel proposal.
At JPMorgan’s investor day in May, Dimon lawmakers argued that Basel and other regulations would end up harming consumers rather than protecting them.
The cumulative effect of the pending regulation would raise the cost of mortgages by at least $500 a year and credit card interest rates by 2%. It would also force banks to charge two-thirds of consumers for checking accounts, according to JPMorgan.
The message: banks won’t just eat the extra cost from regulation, but instead pass it on to consumers.
While all these battles are ongoing, the financial industry has scored several victories so far.
Some argue that the threat of litigation helped persuade the Federal Reserve to offer a new Basel endgame proposal this month that roughly halves the extra capital that larger institutions, including industry-friendly ones, would be forced to hold changes.
It’s not even clear whether the watered-down version of the proposal, a long-held response to the 2008 crisis, will ever be implemented because it won’t be finalized until well after the US election.
If Republican nominee Donald Trump wins, the rules could be further weakened or killed entirely, and even under a Kamala Harris administration, the industry could fight the regulation in court.
That was the banks’ approach to the CFPB credit card rule, which aimed to cap late fees at $8 per incident and was set to take effect in May.
One last attempt from US Chamber of Commerce and banking trade groups successfully delayed its implementation when Judge Mark Pittman of the Northern District of Texas sided with the industry, freezing the rule.
“Shopping Area”
A key driver for banks has been filing cases in conservative jurisdictions where they are likely to prevail, according to Lori Yueassociate professor at Columbia Business School who has studied the interaction between corporations and the judicial system.
The Northern District of Texas powers the 5th Circuit Court of Appeals, which is “known for being friendly to industry lawsuits against regulators,” Yue said.
“Purchasing in spaces like this has become an established corporate strategy,” Yue said. “The financial industry has been particularly active this year in suing regulators.”
Since 2017, almost two thirds of the lawsuits filed by the US Chamber of Commerce challenging the federal regulations have been issued in court under the 5th Circuitaccording to his analysis US officials.
Industries dominated by a few big players β from banks to airlines, pharmaceuticals and energy companies β tend to have well-funded commercial organizations that are more likely to resist regulators, Yue added.
The polarized environment, where weakened federal agencies are undermined by conservative courts, ultimately preserving the advantages of larger corporations, according to Brian Grahamco-founder of banking consultancy Klaros.
“It’s very bad in the long run because it locks in whatever regulations were in place when the reality is the world is changing,” Graham said. “It’s what happens when you can’t pass new regulations because you’re afraid you’ll get sued.”
β With data visualizations by CNBC’s Gabriel Cortes.