Dimon (Jp Morgan): “The crisis is not over yet. And to deal with it, we don’t need stricter rules for the banking system”
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Welcome to Outlook, the Repubblica newsletter that analyzes the economy, finance and international markets.
What I know about financial markets and the economy I learned by working for one of the main stock exchanges on Piazza Affari, the companies that buy and sell securities on the stock exchange for large investors. I took it with me when I became a journalist for La Repubblica where, among other things, I covered investigations and major scandals such as that of Parmalat, helping to unmask its false financial statements. Every Wednesday we will talk about listed and unlisted companies, personalities, institutions, scandals and investigations linked to this world. If you want to write to me, my email is [email protected]. Enjoy the reading
Walter Galbiati, deputy director of Repubblica
This year celebrates the 20 years of the merger that led him to lead the main banking group in the world. Because it was 2004 when Jamie Dimon united Bank One of which he was CEO with JP Morgan Chase giving life to the fourth bank in the world by capitalization and starting a journey that led the group to annex the first reality as Bear Stearns And Washington Mutual and lastly First Republic Bank. A race that ended in 2023 with 162 billion in revenues generated, profits of 49.6 billion dollars and the world record for capitalisation.
Jp Morgan buys. During all crises, JP Morgan it has always passed unscathed and always has a consolidating role, that is, the group that made its solidity available to help other institutions in difficulty. He did it in the years of Lehman’s bankruptcy with Bear Stearns And WaMu and last year with First Republic Bank.
The call of the authorities. Not that it acted on a non-profit basis, but it was certainly encouraged by regulators, as Jamie Dimon explains in his annual letter to investors. “The purchase of First Republic Bank – wrote Dimon – is not an operation that we would have done just for ourselves. But the regulators trusted us, they asked us to step up, we worked side by side with the Federal Reservethe Federal Deposit Insurance Corporation (FDIC) and the US Treasury. The purchase helped stabilize and strengthen the U.S. financial system in a time of crisis.”
The crisis is not over. Now Dimon, after having triumphantly navigated all the storms, is sounding an alarm: that crisis, which has especially afflicted the regional banks hit by the Fed’s rate hike and the simultaneous depreciation of the assets in the portfolio, has not yet passed. “When we bought FirstRepublic in May 2023, after the failure of two other regional banks, Silicon Valley Bank (SVB) e Signature Bank, we thought the current banking crisis was over”.
The reasons. But this is not the case and JP Morgan’s number one explains why. The problem is the long-term rates which, if they go up over 6% and this increase is accompanied by a recession, there will be a lot of tensions, not only in the banking system, but also in highly leveraged companies, i.e. highly indebted. “Remember that a simple 2 percentage point increase in rates essentially reduced the value of most financial assets by 20% and some real estate assets, particularly office properties, may be worth even less due to the effects of the recession and increased vacancies.”
The devaluation of assets generates balance sheet losses and consequently the possible crisis of those who do not have enough capital to cope with those adjustments. The problem for Dimon is therefore the high rates, also because after having had the Fed Funds at zero for a long period, no one is prepared for an opposite scenario of high cost of money for a long time.
Inflationary dangers. And it is possible that the Fed may wait any longer to ease rates because significant inflationary risks still remain. Various factors are keeping the tension on prices high, such as 1) the continuous increase in public spending to support the economy, for example to finance the Green transition 2) the restructuring of supply chains 3) the increase in military spending 4) the increase of healthcare costs.
The monetary tightening. “All this – claims Dimon – could lead to stiffer inflation and higher rates than the markets expect”. But it is not enough because the Fed’s quantitative tightening is also draining from the system beyond $900 billion in liquidity per year and “we have – says Dimon – never truly experienced the full effect of a quantitative tightening on this scale”. Furthermore, the ongoing wars in Ukraine and the Middle East continue to have the potential to disrupt energy and food markets.
Soft or hard landing? Market participants estimate that the possibilities that we witness a soft landing (soft landing) of the economy, i.e. modest growth accompanied by a decline in inflation and interest rates, are between 70 and 80%. But according to Dimon, for all the reasons listed above, it is overly optimistic projections. We focus excessively on monthly data and estimate modest changes in rates without taking into consideration the macro trends described which could affect inflation and consequently the cost of money.
No other rules are needed for banks. We therefore need to be cautious to face the possible prolongation of the crisis, but we certainly don’t need to regulatory tightening that would require banks to have greater capitalisation. In his letter to investors Dimon claims that since the signing of the Dodd-Frank Act in 2010, only in the United States have they been added thousands of standards and reporting requirements written by over 10 different regulatory bodies. Which were of no use.
“It would probably be an understatement – says Dimon – to say that some are duplicative, inconsistent, procyclical, contradictory, extremely expensive and unnecessarily painful for both banks and regulators.”
Against Basel IIIThe target of JP Morgan’s number one is Basel III, the set of rules that Bank for International Settlements (Bis), a sort of central bank of central banks, has drawn up to prevent banking crises from becoming systemic. It all started in the 70s with the bankruptcy of the German bank Herstatt Bank of Cologne and the Franklin National Bank of New York Of Michele Sindona.
It was then that the G10 he was convinced to create within the Bis the Basel Committee with the task of drawing up international regulations, which have evolved over time up to the current version called Basel III, which in addition to capital requirements, for example, requires banks to have the necessary liquidity to face any waves of redemptions on current accounts.
More costs for the banks. “In my opinion, many of the rules are flawed and poorly calibrated. If the final Basel III blueprint were implemented in its current form, it would hamper American banks: it would increase capital needs by 25%. of our businesses, making it 30% higher than the equivalent proposal from the European Union”. This means that for every loan or business financed in the United States by a large American bank, it will have to hold 30% more capital than any international competitor.
More costs for everyone. This cost would be automatically passed on to the services offered by the banks, making 1) i consumer goods 2) i mortgages And loans to small businesses and savers and 3) i infrastructure projects government and otherwise. “I know it might be wishful thinking, but – suggests Dimon – it would be a good time to take a step back and review in a thorough and sincere manner the thousands of new regulations approved after Dodd-Frank”. The banking system and the authorities should get around a table and understand which direction to take, but “with rules – says Dimon – and guidelines simpler and without suffocating our system”.
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