The financial turmoil that led to the downfall of Silicon Valley Bank in the US and Credit Suisse in Europe is not yet over and its effects will be felt for years, the boss of America’s biggest bank has warned.
In an annual letter to JP Morgan’s shareholders, Jamie Dimon said last month’s failure of SVB and the Swiss government-brokered takeover of Credit Suisse by its rival UBS had undermined confidence in the banking system.
“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,” he said.
Although suggesting that there were marked differences with the 2008 financial crisis, Dimon, who has been the chair and chief executive of JP Morgan since 2006, suggested that the risks to the market had been “hiding in plain sight”, in a swipe at regulators.
These risks included exposure to interest rates being raised sharply around the world to tackle soaring inflation. Dimon criticised the US Federal Reserve for failing to incorporate higher borrowing costs into its annual stress tests.
The turmoil in the banking sector had led investors to price in a greater risk of a US recession, Dimon said, warning that banks were now more likely to show caution when approving new lending for businesses and households, with consequences for an economy already struggling with rate increases.
“It is not clear when this current crisis will end,” Dimon said. “It has provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative.”
SVB last month became the largest bank to fail since the 2008 crisis after it was unable to raise emergency funding to plug a multibillion-dollar shortfall in its finances. The technology-focused lender struggled to keep up with a rapid increase in withdrawals, which turned into a run on the bank, which was then seized by US authorities.
That triggered a dramatic sell-off in wider bank shares amid fears of contagion, prompting JP Morgan, Bank of America, Goldman Sachs and others to deposit $30bn (£24bn) in First Republic Bank to support it as it risked becoming the next domino to topple.
Credit Suisse was sold to UBS in an emergency deal orchestrated by the Swiss government. The bank had entered the turmoil in a weak position after years of financial underperformance and scandals, before its top shareholder, the Saudi National Bank, ruled out providing further funding.
Axel Lehmann, the Credit Suisse chair, told investors at the 167-year-old bank’s last-ever annual shareholder meeting in Zurich on Tuesday that he was “truly sorry” the bank had failed to stem the crisis.
“I apologise that we were no longer able to stem the loss of trust that had accumulated over the years and for disappointing you,” he said.
The only major bank chief during the 2008 financial crisis still in the same job, Dimon said the current crisis involved far fewer banks and suggested that there were fewer issues needing to be resolved.
“While the current crisis has exposed some weaknesses in the system, it should not be considered, as I pointed out, anything like what we experienced in 2008.”
Dimon said post-crash rules had encouraged banks to invest heavily in US government bonds, exposing them to paper losses amid a sharp fall in the price of government bonds as major central banks rapidly raised interest rates to tackle soaring inflation.
He said higher interest rates would have an important impact, not just for banks, but for those who need to refinance their borrowing.
Saying that JP Morgan was analysing the impact on all of its clients, and that the bank, which has more than $2tn in assets, was well prepared, he added: “If this tide goes out, you should assume that it will expose additional weaknesses in the economy.”
Despite his criticism of regulators in the letter, the billionaire bank executive also urged policymakers to avoid “kneejerk, whack-a-mole or politically motivated responses” to the crisis. He added: “We do not want to throw the baby out with the bath water.”
Dimon has previously criticised rules introduced after the 2008 financial crisis, which were designed to make banks safer, as “anti-American”, while arguing that legal fines imposed on the industry after the last crash amounted to an “assault” by US regulators.
