The amount of uncertainty pulsing through the markets right now is escalating on a daily basis. Ray Dailo, the founder and CEO of the world's largest hedge fund, Bridgewater Associates, which focuses on macroeconomic trends, classified it in a note to clients on Tuesday as "exceptional" and recommends that investors avoid concentrated bets or holding assets that can't be easily liquidated.
The principal concern for companies is that the world will move in a protectionist direction, erecting tariffs and igniting a trade war. This happened after World War I and helped to create the conditions that led to the economic troubles of the 1930s.
This would be especially harmful for manufacturers and retailers, who depend on global trade to construct their wares and stock their stores. But it's also bad for banks. And it's especially bad for the nation's biggest banks, which generate a meaningful portion of revenue from the facilitation of cross-border capital flows.
Measuring country risk
It's for this reason that I've begun looking at which of the nation's banks have the most international exposure. Citigroup (NYSE:C) is at the top of the list, as I note here. But not far behind is JPMorgan Chase (NYSE:JPM).
All of the big banks disclose so-called "country risk" in their regulatory filings. JPMorgan defines this as "the risk that a sovereign event or action alters the value or terms of contractual obligations of obligors, counterparties and issuers or adversely affects markets related to a particular country."
Banks convey country risk by listing the foreign markets that they have the most exposure to. Citigroup offers the 25 markets where its net exposure is greatest. JPMorgan Chase and Bank of America (NYSE:BAC) limit their disclosure to 20 countries. Comparing these lists thereby allows an investor to get at least a cursory idea for which banks rely the most on a thriving global, as opposed to domestic, economy.
In JPMorgan's case, it had $293 billion worth of exposure to its 20 largest international markets. That's well below Citigroup's $525 billion worth of exposure, but nevertheless comfortably above Bank of America's $212 billion.
Everything is relative
Of course, given that these banks aren't all the same size, just comparing the absolute dollar amount of international exposure doesn't give one a very good grasp for how much any individual bank relies on cross-border capital flows. To gauge this, it helps to look as well at the amount of international exposure a bank has compared to its size.
JPMorgan is the biggest bank in the United States, with $2.5 trillion worth of assets on its balance sheet. That's nearly 40% larger than Citigroup, which has a $1.8 trillion balance sheet, and 14% bigger than Bank of America.
Taking this into consideration, JPMorgan's exposure looks less ominous, as it equates to only 12% of its total assets. That's more than Bank of America's 10%, but well below Citigroup's 29%.
To be clear, using these figures to gauge the relative impact that protectionist policies or an all-out trade war will have on banks is far from precise. After all, if the global economy does head south, that would hurt banks' domestic operations as well. It would decrease loan demand and increase loan losses.
All of these banks also hedge to protect themselves from a variety of possible outcomes. And you can rest assure that few banks will be as well positioned as JPMorgan Chase to combat any deleterious trends that may materialize. Its CEO Jamie Dimon was the first banker that I'm aware of to call out the ominous storm clouds accumulating on the horizon which then unleashed the fury of the financial crisis.
One could even go so far as to conclude that this was the reason Dimon thought it was so important for him to stay at JPMorgan Chase as opposed to pursue entreaties to become Treasury Secretary. That's rote speculation, but if things do get bad, then shareholders of the New York City-based bank will be thankful that he stuck around.