JPMORGAN RESULTS SHOW BANKING'S NEW WORLD ORDER

It’s bank-earnings season this week, meaning it's time for the ritual “That Was the Quarter That Was” from the likes of Goldman Sachs, Bank of America and so on. But instead of sifting through the rubble to uncover some meaningful nuggets from JPMorgan Chase, the first bank that reported Tuesday, we’re instead going to take a broader look at the institution—the city’s largest private-sector employer—to demonstrate how different banking has become in the postcrisis world.

At first glance, it would be easy to claim that really nothing has changed. JPMorgan was huge before the crisis and is larger than ever now, with a record $2.5 trillion in loans, investments and other assets on its books.

But a closer look reveals JPMorgan is a very different institution than before.

For starters, even though JPMorgan’s assets are growing, revenues are steadily shrinking. They were down by 2% through the first nine months of this year, although they rose a bit last quarter. In fact, revenues at the bank haven’t grown in any year since 2010, when they topped out at $103 billion. That represents a big change in direction for a bank that grew revenues by 15% in 2007 and a similar amount in 2006.

Those declines show how regulatory changes are having their effect. For example, federal authorities want banks like JPMorgan to dial down risk. One way to measure this is by looking at its value-at-risk, a calculation that tries to estimate the amount of money the bank’s trading desk could lose on any given day. JPMorgan’s value-at-risk is $31 million now. In 2007, it was $124 million. Another way to look at it is that the bank’s perceived riskiness of its trading book has declined by 75%. (The fact that these perceptions sometimes prove wildly inaccurate is a matter for another column.)

In addition to making fewer risky trades and loans, JPMorgan funds itself more conservatively. About 58% of its liabilities are deposits, up from 51% seven years ago. Trading obligations and repurchase agreements—overnight loans that during the financial crisis became impossible to get—have shrunk to 15% of JPMorgan’s liabilities, down from 22% in 2007. Trading partners call in their money and run away almost instantly in a crisis, but most depositors don’t because the government guarantees they won’t lose money in a bank failure.

Finally, JPMorgan is financing its activities with much less borrowed money. A type of capital called Tier 1 is now equal to 11.5% of its assets. In 2007, its Tier 1 capital ratio was 8.4%. Higher levels of higher-tier capital mean the bank has more capacity to absorb losses without having to raise fresh cash.

Add it all together, and you have a bank that may still be the living definition of "too big to fail," but one that at least is run more conservatively than before. That’s good for taxpayers, although Chief Executive Jamie Dimon can't be happy to see revenues steadily shrink. JPMorgan wouldn't comment.

This state of affairs at JPMorgan describes what most every big bank is grappling with these days, although of course every unhappy big bank is unhappy in its own way. While the banks lobby Washington hard to rein in the regulators, there’s not much they can do in the meantime besides reducing costs by getting rid of people, maybe try to capture a little more market share, and hope for the return of something like the halcyon days of yore.

Crain's New York Business