As the CEO of JPMorgan Chase (JPM 2.51%), the largest bank by assets in the U.S., Jamie Dimon has always been fairly outspoken when discussing issues such as regulation, fintech, or other banking topics of importance.
But since the collapse of SVB Financial and Signature Bank in March, Dimon has been fairly quiet, likely because he's been playing a large role behind the scenes in trying to shore up confidence in the industry and save First Republic, which reportedly saw $70 billion of deposit outflows in March.
Recently, Dimon released his widely read annual letter to shareholders, where he talks about the current state of JPMorgan Chase, America's largest bank, as well as other relevant matters in the industry. Let's take a look at what he had to say about the recent banking crisis and regulation as it relates to this.
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More isolated, but plenty of blame to go around
On a positive note, Dimon said he viewed the recent events and bank collapses to be "nothing like what occurred during the 2008 global financial crisis (which barely affected regional banks)."
The events in March were much more isolated, whereas in 2008 there was $1 trillion of mortgage loans defaulting, and many of these loans were owned by large institutions all over the world that were interconnected. Many that didn't own the mortgages directly had exposure to them.
In terms of SVB specifically, Dimon did not let management off the hook, but he did say that "this wasn't the finest hour for many players." Many stakeholders have blamed regulators for their inability to pick up on the problems earlier. SVB had been losing tens of billions in deposits in the quarters leading up to their demise, and their bond portfolio had been deeply underwater for several quarters.
New media reports have come out suggesting that regulators were aware of issues and had actually previously given them a poor rating using the regulatory CAMELS rating system, which seeks to measure capital adequacy, asset levels, management capability, earnings, liquidity, and sensitivity to market risk. That reflects poorly on the bank's risk management, but it's not clear that any of these actions were enough to change the bank's future actions. CAMELS ratings are kept very confidential.
In fact, what prompted SVB to sell a large chunk of its securities portfolio (the beginning of the end for the bank) was reportedly a call from Moody's Investor Service that it was planning to downgrade the bank's credit rating.
Assessing the reaction
Dimon spent less time dissecting the crisis and more time in his letter discussing the potential reaction. He also added that "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 stressed that every banker should want to strengthen community and regional banks, which "fill a critical role in small communities... that some large banks simply can't provide -- or can't provide cost-effectively." Dimon also pointed out that JPMorgan provides a wide range of banking services to 350 other U.S. banks, so these are customers as well.
Still, that didn't stop Dimon from stressing the need for the large megabanks, which provide services like investment banking, payments capabilities, foreign exchange, and research in ways that even super-regional banks cannot. He also stressed that "we need banks to be attractive investments." After every crisis caused by the banks, there's fear that a raft of new regulations will follow and require banks to hold more capital or do other things that hurt their returns and make them less-appealing stocks.
Ultimately, Dimon wants regulation to be more transparent and for the rigorous stress testing that banks go through to be more realistic and less "about crossing t's and dotting i's." He noted "that regulations, the supervisory regime, and the resolution regime currently in place did not stop SVB and Signature Bank from failing -- and from causing systemwide issues."
Finally, Dimon talked about the need to shape regulation around what people do and do not want in the banking system. For years, Dimon has alleged that banking regulation has pushed much more lending outside the system and into the shadow banks, while also leading banks to abandon certain activities like mortgage lending, which they struggle to make money on.
After all, the purpose of bank regulation is to make sure that banks can lend to individuals, families, and businesses during times of duress. Would shadow banks be able to do this, Dimon wonders?
The major takeaways
There's certainly a lot here, but a lot of this goes back to things about regulation Dimon has said in the past.
While I do think he makes some good points, I'm guessing that the regulation is going to become more burdensome, although I do think regulators need to seriously consider the issue Dimon raised about shadow banking and change the way they approach stress testing. This may have already begun to take place anyway with the addition of new scenarios in this year's stress testing.
The most interesting thing I heard Dimon say is that the banking crisis isn't over. That could mean he knows something about First Republic, a situation that Dimon has reportedly been very involved in. Or Dimon could believe that the deposit situation is going to intensify even further. It's certainly an ominous sign.
