Jupiter’s Guy de Blonay predicts the trading revenues of investment banks could drop by up to 20% if tougher regulations are implemented in America in the wake of JPMorgan’s $2 billion (£1.3 billion) trading loss.
The Obama administration is considering more stringent financial regulations and the implementation of the Volcker Rule following the bank’s loss on credit derivatives in its Chief Investment Office earlier this month.
The Volcker Rule, which prevents banks from trading for their own accounts aside from hedging risk, was passed into law by President Barack Obama in 2010 as part of the Dodd-Frank financial oversight law. However, the details are still to be finalised and the rule has yet to be enforced.
De Blonay, the manager of the Jupiter Financial Opportunities fund, says: “I believe that JP Morgan’s losses and impact on earnings is manageable. However, the broader concern is how this will impact regulation, especially regarding the Volcker Rule, which could trim industry trading revenues by 5%-20%.
The manager adds that the debate about breaking up the banks will also return to the fore, with the probability of it happening now higher than it was a week ago.
“The adequate regulation will bring credibility back to the banking sector and will ultimately command higher valuations,” he says.
John Yakas, the manager of the Polar Capital Financial fund, which holds a 3% position in JP Morgan, says the trading that led to the losses at the bank is “part and parcel of investment banking activity”.
“It is an election year in the US, so banking has become quite politicised,” Yakas says. “This case has more of a profile because of the political implications than the impact on JP Morgan. It is perfectly manageable for JP Morgan, although obviously they are not managing risk as well as they should have been.”
Yakas says the result of the bank’s losses from a political point of view is likely to be tighter regulation. “If limits are imposed on banks’ ability to trade, their returns will be reduced,” he says. “However, although the banks’ traditional revenues will fall, there are other revenue streams, such as fee income.”