JPMorgan CEO Jamie Dimon says we're not in the clear from the recent banking meltdown and we could reckon with the fallout for years, he wrote in his annual shareholder letter released early Tuesday.
Bank Risks 'Hiding In Plain Sight'
"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," Dimon wrote. He said the recent failures of Silicon Valley Bank, Credit Suisse and related stress in the banking system highlights that just meeting regulatory requirements is not enough.
"Most of the risks were hiding in plain sight," Dimon wrote, citing interest rate exposure, fair value of held-to-maturity portfolios and the amount of SVB uninsured depositors that were known to regulators and the marketplace.
However, it is unlikely any recent regulatory requirement changes made a difference because of the small number of venture firms that moved their deposits in lockstep, according to Dimon. And Fed stress testing never incorporated higher interest rates, he noted.
"This is not to absolve bank management — it's just to make clear that this wasn't the finest hour for many players," Dimon wrote. "All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them."
Dimon emphasized recent events "are nothing like what occurred during the 2008 global financial crisis."
Roughly $1 trillion in rotting consumer mortgages triggered the prior crisis and affected major entities around the world, many of which failed. The current crisis involves "far fewer" financial players and issues to resolve, Dimon said.
Dimon On Banking Going Forward
"Any crisis that damages Americans' trust in their banks damages all banks," Dimon wrote. He noted it is true the current bank crisis "benefited" larger banks through the inflow of deposits to larger institutions from smaller firms.
But he said that it was "absurd" to think the current crisis has been good for bank giants.
JPMorgan will report first-quarter earnings on April 14.
JPMorgan's longtime CEO said the crisis will pass and regulatory changes will be made. But it's important to avoid "knee-jerk, whack-a-mole or politically motivated responses," Dimon wrote.
Dimon said it's critical to strengthen regional, midsize and community banks. And global banks need both huge economies of scale and diversified earning streams.
The system needs transparent, strong regulators, market makers with the ability to effectively intermediate, and more thoughtful regulation, particularly stress testing, going forward, Dimon said.
Regulations should make it easier for banks to make loans, intermediate risks, finance the economy, manage bank runs and fail if necessary, Dimon wrote. "If done properly, banking regulations could be calibrated — adding virtually no additional risk," he said.
JPMorgan Actions
"It's always best to adjust to new reality quickly," Dimon said. JPMorgan is taking additional actions for the business to succeed in current and future environments.
Nonbanks are better at holding some types of credit and loans. And banks increasingly need a lot of noncredit-related revenue, Dimon said.
JPMorgan is reducing clients' nonoperating cash deposit due to various capital requirements. The bank plans to implement tighter management and business execution strategies. This may include repricing businesses, running off unprofitable products, changing business mix for clients and more rigorously evaluating clients.
"Unfortunately, it is becoming increasingly difficult for banks to stay in the mortgage business, which ultimately hurts everyday Americans," Dimon wrote. High origination and servicing costs, operational challenges and the lack of a healthy securitization market all weigh on banks.
"It barely makes sense for banks to hold mortgages or mortgage-servicing rights," Dimon wrote. "Many banks have already reduced much of this business. We are hanging on, continuing to hope for meaningful change."
Finally, Dimon said banks have the ability to add low-capital or no-capital revenue streams, such as data and analytics for trading, travel and relevant offers in consumer bank, wealth management and payment services businesses.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
