The stress on the financial sector caused by two bank failures in the United States last month is still a threat and should be addressed by a reimagining of the regulatory process, according to JPMorgan Chase CEO Jamie Dimon.
“As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come,” the longtime CEO said in his annual letter to shareholders Tuesday.
“But importantly, recent events are nothing like what occurred during the 2008 global financial crisis,” he added.
The recent banking issues in the U.S. began with the collapse of Silicon Valley Bank, which was closed by regulators on March 10 as depositors pulled tens of billions of dollars from the bank. The smaller Signature Bank was closed two days later. And in Europe, Swiss regulators brokered a purchase of Credit Suisse by UBS.
JPMorgan and other large banks stepped in to make $30 billion of deposits at First Republic, another regional lender that investors feared could become the next SVB.
The stress on the regional banks has led investors and analysts to suggest that the “too big to fail” institutions would be a beneficiary of the crisis, but Dimon said JPMorgan wants to strengthen the smaller banks for the benefit of the whole financial system.
“Any crisis that damages Americans’ trust in their banks damages all banks – a fact that was known even before this crisis. While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd,” Dimon wrote.
Regulatory changes
Dimon also cautioned against knee-jerk changes to the regulatory system. He wrote that most of the risks, including the potential losses from held-to-maturity bonds, were “hiding in plain sight.” The interconnected network of SVB’s deposit base was the unknown variable, he said.
“The recent failures of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Europe, and the related stress in the banking system, underscore that simply satisfying regulatory requirements is not sufficient. Risks are abundant, and managing those risks requires constant and vigilant scrutiny as the world evolves,” Dimon wrote.
The JPMorgan CEO instead called for more forward-looking regulation. He pointed out that the held-to-maturity bonds that have become problems for many banks are actually highly rated government debt that scores well under current rules, and that recent stress tests did not game out a rapid rise in interest rates.
“This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them,” Dimon wrote.
He said that regulation should be “less academic, more collaborative” and that policymakers should be more wary of potentially pushing some financial services to nonbanks and so-called shadow banks.
Climate and A.I.
Two other broad topics that Dimon touched on, besides the financial results of JPMorgan, were the need for investments in climate technology and resiliency programs and the rise of artificial intelligence.
Dimon said that there needed to be more urgency at many different levels to speed up the development of green technology, raising permitting reform and eminent domain as two areas to consider.
“To expedite progress, governments, businesses and non-governmental organizations need to align across a series of practical policy changes that comprehensively address fundamental issues that are holding us back,” Dimon wrote.
And for AI, which has rocketed to the forefront of investors’ minds since the launch of OpenAI’s ChatGPT in November, Dimon said JPMorgan already has hundreds of use cases for AI in production but stressed the importance of being careful with the technology.
“We take the responsible use of AI very seriously and have an interdisciplinary team of ethicists helping us prevent unintended misuse, anticipate regulation, and promote trust with our clients, customers and communities,” the CEO wrote.
The shareholder letter comes after a rough year for markets, with the major U.S. averages dropping into bear markets in 2022. Dimon called it a challenging year for the world, citing the war in Ukraine and rising geopolitical tensions with China.
However, the CEO said 2022 was “somewhat surprisingly” strong for JPMorgan. The bank’s stock fell 15% during the calendar year, but it generated more than $37 billion in net income.
Written by Jesse Pound for CNBC ~ April 4, 2023
