Jamie Dimon, CEO and Chairman of JPMorgan Chase, gestures during his speech during the U.S. Senate Banking, Housing and Urban Affairs Committee hearing on oversight of Wall Street firms on Capitol Hill on December 6, 2023 in Washington, DC
Evelyn Hockstein | Reuters
Buried in a quarterly file of about 200 pages JPMorgan Chase Last month there were eight words that underscored how contentious the bank's relationship with the government has become.
The lender announced that the Consumer Financial Protection Bureau could penalize JPMorgan for its role in Zelle, the massive peer-to-peer digital payments network. The bank is accused of failing to remove criminal accounts from its platform and failing to compensate some fraud victims, according to people who declined to be identified and reported ongoing investigations.
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 unthinkable in earlier times, policy experts say, largely because companies used to be afraid of provoking their supervisors. This is particularly true for the American banking industry, which needed hundreds of billions of dollars of taxpayer money to survive after irresponsible lending and trading activities caused the 2008 financial crisis, these experts say.
But a combination of factors in recent years has created an environment in which banks and their regulators have never been more far apart.
Trade groups say banks have become easy targets for populist attacks from Democratic-led regulators in the wake of the financial crisis. Regulatory officials point out that banks and their lobbyists are increasingly relying on courts in Republican-dominated districts to stave off reforms and protect billions of dollars in fees at the expense of consumers.
“If you look back 15 or 20 years, the view was that antagonizing the regulator was not particularly wise and that suing all of these things was just an attack on the hornet's nest,” said Tobin Marcus, head of the US Politics Department at Wolfe Research.
“The discrepancy between how ambitious [President Joe] “Biden’s regulators have been historically widespread and how conservative the courts are, at least some of the courts,” Marcus said. “This has created so many opportunities for successful industry litigation against regulatory proposals.”
Attack on fees
Those forces collided this year, one of the most consequential for banking regulation since post-2008 reforms that curbed Wall Street's risk-taking, introduced annual stress tests and created the industry's main rival, the CFPB.
In the final months of the Biden administration, efforts by a half-dozen government agencies aimed to reduce fees for late credit card payments, direct debit transactions and overdrafts. The biggest threat to the industry was the Basel Endgame, a sweeping proposal that would force big banks to hold tens of billions of dollars more in capital for activities like trading and lending.
“The industry is facing an onslaught of regulatory and potential legislative changes,” Marianne Lake, JPMorgan’s head of consumer banking, warned investors in May.
JPMorgan's disclosure of the CFPB investigation into Zelle comes after years of discussions by Democratic lawmakers about financial crimes on the platform. Zelle was launched in 2017 by a bank-owned company called Early Warning Services in response to the threat posed by peer-to-peer networks PayPal.
The vast majority of cell activity is uneventful; Of the $806 billion that flowed through the network last year, only $166 million in transactions were disputed as fraudulent by JPMorgan customers. Bank of America And Wells Fargothe three biggest players on the platform.
But the three banks combined have reimbursed only 38% of those claims, according to a July Senate report examining disputed unauthorized transactions.
Under the Electronic Fund Transfer Act, banks are typically forced to refund fraudulent Zelle payments for which the customer has not provided authorization. However, they typically do not reimburse losses if the customer is tricked into authorizing payment by a fraudster.
A JPMorgan payments manager told lawmakers in July that the bank actually reimburses 100% of unauthorized transactions; The discrepancy in the Senate report's findings is because bank officials often determine that customers authorized the transactions.
As part of the audit, the bank began warning Zelle users on the Chase app to “protect yourself from fraud,” adding that customers would likely not receive a refund for fake transactions.
JPMorgan declined to comment for this article.
Dimon in front
The company, which under CEO Jamie Dimon has become the largest and most profitable American bank in history, is at the center of several other clashes with regulators.
Thanks to his reputation for guiding JPMorgan through the 2008 crisis and last year's regional banking unrest, Dimon may be one of the few CEOs with the reputation to openly criticize regulators. This became clear this year when Dimon led a campaign, both publicly and behind closed doors, to weaken the Basel proposal.
In May, at JPMorgan's investor day, Dimon's deputies argued that Basel and other regulations would ultimately harm consumers rather than protect them.
The cumulative effect of the upcoming regulation would increase the cost of mortgages by at least $500 per 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: The banks don't simply eat up the additional costs of regulation, but pass them on to consumers.
While all these battles are ongoing, the financial industry has achieved several victories so far.
Some say the threat of litigation helped persuade the Federal Reserve to unveil a new Basel Endgame proposal this month that, among other industry-friendly changes, would cut by roughly half the additional capital the largest institutions would be required to hold.
It's not even clear whether the watered-down version of the proposal, a long-planned response to the 2008 crisis, will ever be implemented because it won't be finalized until well after the U.S. election.
If Republican candidate Donald Trump wins, the rules could be further weakened or eliminated altogether, and even under a Kamala Harris administration, the industry could challenge the rule in court.
That's the banks' approach to the CFPB credit card rule, which was aimed at capping late fees at $8 per incident and was set to take effect in May.
A final effort by the U.S. Chamber of Commerce and banking groups successfully delayed implementation when Judge Mark Pittman of the Northern District of Texas sided with the industry and granted a freeze on the rule.
“Location shopping”
A key strategy for banks is to file lawsuits in conservative jurisdictions where they are likely to prevail, according to Lori Yue, an associate professor at Columbia Business School who has studied the interaction between corporations and the justice system.
The Northern District of Texas is involved in the 5th Circuit Court of Appeals, which is “known for its friendliness in industry lawsuits against regulators,” Yue said.
“Such venue shopping has become an established corporate strategy,” Yue said. “The financial industry has been particularly active in suing regulators this year.”
Since 2017, nearly two-thirds of lawsuits filed by the U.S. Chamber of Commerce challenging federal regulations have been heard in 5th Circuit courts, according to an analysis by Accountable US.
Industries dominated by a few large players – from banks to airlines to pharmaceutical companies and energy companies – tend to have well-funded trade organizations that are more likely to resist regulators, Yue added.
The polarized environment in which weakened federal agencies are undermined by conservative courts ultimately preserves the advantages of the largest companies, according to Brian Graham, co-founder of banking advisory firm Klaros.
“It's really bad in the long run because it locks in all the previous rules while the world is actually changing,” Graham said. “This is what happens when you can’t enact new regulations because you’re afraid of getting sued.”
– With data visualizations from CNBC’s Gabriel Cortes.