Four banks in the U.S. have now collapsed since March, and while it looks like much of the banking system has avoided broader contagion, the banking crisis is certainly not over just yet. Recently, shares of the Los Angeles-based lender PacWest Bancorp (PACW) have come under pressure, with the stock now down more than 79% this year.
Jamie Dimon, the outspoken CEO of JPMorgan Chase (JPM 0.49%), has successfully steered the country's largest bank through several recessions and banking crises, making him a natural leader in the industry.
Dimon has never been one to hold back. Here's how he thinks regulators should address the banking crisis moving forward.
JPMorgan Chase CEO Jamie Dimon. Image source: JPMorgan Chase.
Do what has to be done
Speaking to Bloomberg recently, Dimon said, "We need to finish the bank crisis... Whatever the FDIC, the OCC, the Fed -- whatever they need to do to make it better, they should do."
Since JPMorgan acquired most of First Republic from regulators and the renewed focus on the sector, bank stocks have gotten crushed, and some have seemingly sold off for no reason at all. However, once stocks begin to sell off, customers and shareholders get worried, and it starts a nasty cycle that can turn into a self-fulfilling prophecy. For instance, PacWest recently disclosed that it lost 9.5% of its deposits, most of which occurred after media reports indicated the bank was weighing its options and exploring a sale.
Dimon also said he thinks the Securities and Exchange Commission (SEC) should consider a ban on the short-selling of bank stocks, especially if they are spreading false information.
Part of the problem -- and what Dimon might have been referring to in his quote -- is that banking is all about psychology. Once depositors have the slightest concern about any possibility of losing their money, they begin to panic -- and rightfully so.
But as legendary investor Warren Buffett mentioned at Berkshire Hathaway's annual meeting, all deposits, even those not insured by the Federal Deposit Insurance Corp. (FDIC), are actually quite safe. It's very unlikely that Congress or regulators would ever allow depositors to lose any of their money because that on its own would really hurt confidence in the system. Lawmakers and regulators have not implicitly said this, due to the fact that it may not be legal for them to do so, but I think most experts believe that more implicit messaging might help the current situation.
Don't overreact
Since the implementation of Dodd-Frank, the major banking regulation put into place following the Great Recession, Dimon has been very critical of certain aspects of the new regulatory regime that, in his opinion, do not promote a healthy banking system. Dimon is worried that regulators will overreact to the current crisis and implement many new regulations that will make things more difficult for banks that are quite healthy right now.
"If you overdo certain rules, requirements, regulations -- there are some of these community banks that tell me they have more compliance people than loan officers," he said.
The problem with excessive regulation and capital requirements is that it pushes a lot of banking activity outside the heavily regulated banking system and into what Dimon calls the shadow banking system. Still, Dimon believes some changes are indeed needed, including stress testing that incorporates a wider range of economic outcomes, such as the rapid and unexpected rise of interest rates. Dimon also believes regulators need to get a better handle on the financial condition of smaller banks.
Finally, while Dimon believes that the senior management teams and the boards of directors of the failed banks are certainly to blame, "there needs to be humility on the part of regulators." After all, the problems surrounding SVB Financial's Silicon Valley Bank were well known in advance of the bank's demise, and while no one could have predicted the intensity of the bank run that occurred, not enough was done to prevent the situation. In fact, the Federal Reserve has actually taken responsibility for its poor oversight of SVB in a recent report.
Changes are coming
Make no mistake: Changes are certainly coming to bank regulation that will likely intensify bank capital and liquidity requirements.
I think some of these changes certainly make sense, especially to account for how social media and technology have changed banking. More intense liquidity requirements and the inclusion of unrealized bond losses into the regulatory capital ratios of regional banks are two examples.
But I think Dimon is trying to advocate for regulations that bolster the safety and soundness of the banking sector without making bank stocks uninvestable or pushing too much banking activity into the shadow banking system.
