History is full of famous spats between ornery geniuses.
Issac Newton, for example, when he wasn’t decoding gravity and light, spent years in pointless debate with Gottfried Leibniz, his only mathematical equal of the time, about who invented calculus (answer: both of them did but they couldn’t agree to disagree). Newton spent years in pointless debates with just about everybody.
Less well-known – except in mathematical circles – is the bitter late 19th century dispute between Georg Cantor and Leopold Kronecker on the nature of infinity. Cantor put the case for multiple infinities; Kronecker was a whole numbers kind-of guy.
“God made the integers, all else is the work of man,” Kronecker said.
Cantor replied: “The fear of infinity is a form of myopia that destroys the possibility of seeing the actual infinite…”
Kronecker never did concede the argument despite Cantor’s elegant ‘diagonal’ proof that should’ve ended it.
And, finally, consider the high-profile to-and-fro between Albert Einstein and Niels Bohr about the reality (or unreality) of the quantum mechanical world played out at two consecutive Solvay Conferences – founded in the early 20th century to bring the best physicist brains to bear on the big problems of the day.
The Bohr-Einstein clash established some of the frequently-asked-questions that still vex physicists to this day.
Dimon hands: JP Morgan chief lays out regulatory cards
But the war of big ideas is not limited to the theoretical battlefields of science and pure maths. In the financial world, too, there are rising tensions between the institutional incumbents and emerging challengers about who controls the future of money.
Fiorino believes the increasing conflict between the forces of establishment and disruption matter today, and will be even more important in the future.
We have dedicated the next two issues to describing two of the hot-spots in global finance: firstly, the tussle between banks and the increasingly belligerent Big Tech sector; and, in the following Fiorino, the more stealthy invasion of the non-bank sector – also known as ‘shadow banking’ – on the territory historically inhabited by traditional financial firms.
While the ideological divide between Big Tech and old money has been simmering for years, Jamie Dimon, current chief of banking behemoth JP Morgan, brought it out into the open in his recent annual dispatch to shareholders.
In his much-anticipated shareholder report, Dimon predicted that the US economy boom will extend well into next year. But more interesting than his bullish economic forecast, in the letter Dimon also drew the battle-lines between the banking industry and the technology sector, which covers the foot-soldiers of ‘fintech’ as well as the Big Tech generals (into which, curiously, he included Walmart).
Possibly, Dimon’s defence of the banking elite could come across as self-serving, but he arranges the evidence in impressive fashion. His table, reproduced in slightly modified form in figure 1, clearly shows the regulatory playing field is absurdly tilted against traditional banks, giving Big Tech a massive advantage in the financial game.
True, the table is a little too US-centric (as is the Big Tech sector for that matter) but we think Dimon has hit on something of fundamental importance that hints at regulatory hostilities ahead.
Figure 1. Regulation: banks v fintech
Higher capital requirement (set by regulators)
Lower capital requirement (set by the market)
No operational RWAs
Strict BIS III liquidity requirements
FDIC insurance (€12bn cost to JP Morgan over the last decade)
UK bank levy and surcharges
No UK bank levy
More costly regulation (CCAR, resolution planning)
Less costly regulation (CCAR, resolution planning)
Heavy restrictions regarding privacy and use of data
Fewer restrictions regarding privacy and use of data
Extensive AML/KYC requirements
Less extenjsive AML/KYC requirements
Social requirement (CRA)
Virtually, no social requirement
Extensive regulatory reporting requirement
Limited public reporting requirement
Lower revenue opportunities (Durbin: $17bn cost to JP Morgan over the last 10 years)
Higher debit card income
Source: Federated Hermes, JP Morgan, as at April 2021. See the Glossary below for more information and references to previous editions of the blog that touched on some of the topics outlined above.
Unsurprisingly, Dimon would like to see an even pitch for fairer competition between banks and Big Tech. However, his main point challenges regulators to consider whether the current legislative skew in favour of tech is intentional or simply an oversight.
Regulatory clock ticks for tech
If the Big Tech regulatory free-pass is intentional then Dimon asks why major financial firms – destined to lose market share in an unfair game – would then require the Globally System Important Bank rules to constrain them.
On the other hand, if regulators merely failed to notice Big Tech take a beach-head in finance then he suggests they should take action now the conflict is out in the open.
Dimon’s hunch is that the regulatory pendulum will start swinging against the Big Tech oligopoly. A number of other high-level thought-pieces have followed a similar line to the JP Morgan chief, including a recent analysis from the Bank of International Settlement (BIS)1.
Augustin Carstens, BIS boss, for instance, famously said that “data can substitute for collateral”2.
And perhaps the mood is shifting against the current regulation-lite environment enjoyed by Big Tech players in Washington. In the US, political capital bipartisan hostility towards technology giants has soared to new heights, raising the likelihood of tougher regulation ahead.
The financial sector is not alone in attempting to hold off the newly empowered horde of technology companies. We see similarities between the financial services industry and the data and semiconductors (semis) industries, for example. Both data and semis are said to be the new oil.
Indeed, Covid-19 is accelerating a structural shift in demand for semis. As the world becomes more interconnected, more automated, and even greener, each unit of GDP growth will contain a higher content of semiconductors.
American defence (reshoring) and offence (tech IP controls) lay the foundations for long-term US (and allies) dominance of semis production.
There is no argument that Big Tech and the growing army of fintechs present a very real existential threat to the traditional banking sector. But Fiorino contends that the larger financial institutions (such as JP Morgan) can hold their own in the fight while smaller firms will inevitably consolidate.
To win the war with technology, however, incumbent banks will, ironically, have to increase the proportion of their short-term spending on technology – and on new systems, too, rather than patching-up crumbling old IT architecture.
By most counts Bohr bested Einstein in big quantum debates at the Solvay Conferences. More than 100 years later, banks may have to channel their inner-Bohr to fend off the most commercially challenging arguments they have ever heard.
- FDIC: Federal Deposit Insurance Corporation. See Fiorino, April 2021 https://www.hermes-investment.com/ukw/insight/fiorino/doomsday-at-the-bank-a-spoonful-of-measures-helps-the-resolution-go-down/ for more information on this topic.
- BIS 3: Basel 3. See Fiorino, February 2021 https://www.hermes-investment.com/ukw/insight/fiorino/fiorino-10022021/ for more information on this topic.
- CCAR: Comprehensive Capital Analysis and Review. See Fiorino, October 2020 https://www.hermes-investment.com/ukw/insight/fixed-income/fiorino-28092020/ for more information on this topic.
- AML: Anti Money Laundering
- KYC: Know Your Customer
- CRA: Community Reinvestment Act. See: https://www.federalreserve.gov/consumerscommunities/cra_about.htm
- Durbin Amendment: Section 1075 of the Dodd Frank Act (DFA), Durbin caps debit card interchange fees for certain transactions