Current Banking Crisis “Is Not Over Yet” – Jamie Dimon Warns Of “Repurcussions For Years To Come”

Having correctly forecasted the “unprecedented” risks from the combination of inflation, war, and COVID in last year’s letter, JPMorgan CEO Jamie Dimon offers only a very dim silver lining for the way forward (current consumer strength and AI opportunities) while warning that the banking crisis is “not over yet”, fearing an “overreaction” by regulators,

“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. But importantly, recent events are nothing like what occurred during the 2008 global financial crisis.”

Dimon is quick to point the finger of blame at the regulators…

“Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements,” Dimon said.

“Even worse,” he added, the Federal Reserve didn’t stress-test banks on what would happen as rates jumped.

Though he admits management are not without blame….

“This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players,” he said.

“All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them.”

The CEO is the nation’s largest bank warns of damage to ‘trust’ in the banking system:

“Any crisis that damages Americans’ trust in their banks damages all banks – a fact that was known even before this crisis. While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd,” Dimon wrote.

Dimon also cautioned against knee-jerk changes to the regulatory system.

Dimon said that regulation should be “less academic, more collaborative” and that policymakers should be more wary of potentially pushing some financial services to nonbanks and so-called shadow banks.

He wrote that most of the risks, including the potential losses from held-to-maturity bonds, were “hiding in plain sight.”

“The recent failures of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Europe, and the related stress in the banking system, underscore that simply satisfying regulatory requirements is not sufficient. Risks are abundant, and managing those risks requires constant and vigilant scrutiny as the world evolves,” Dimon wrote.

Dimon then offered an upbeat tone, adjusting from “hurricane” threats for the economy to hoping that “storm clouds peacefully and painlessly dissipate” suggesting that “businesses are pretty healthy and credit losses are extremely low,” making careful use of the present tense:

“…as of April 1, 2023, spending has been consistently running higher versus the prior year..”

Consumer “balance sheets are in great shape as they still have, according to our own analysis, $1.2 trillion more “excess cash” in their checking accounts than before the pandemic (credit card debt is simply normalizing).”

The JPMorgan CEO then departed his usual beat of finance and addressed climate change and AI.

Going ‘green‘ is going to need more government spending, according to Dimon (raising permitting reform and eminent domain as two areas to consider):

“We simply are not getting the adequate investments fast enough for grid, solar, wind and pipeline initiatives,” he said, urging authorities to make it easier to get permits.

To expedite progress, governments, businesses and non-governmental organizations need to align across a series of practical policy changes that comprehensively address fundamental issues that are holding us back,” Dimon wrote.

“The window for action to avert the costliest impacts of global climate change is closing.”

Artificial intelligence is “extraordinary” and will be crucial to JPMorgan’s future:

“We take the responsible use of AI very seriously and have an interdisciplinary team of ethicists helping us prevent unintended misuse, anticipate regulation, and promote trust with our clients, customers and communities,” the CEO wrote.

While AI can be helpful in areas such as marketing and spotting risks, it’s essential for heading off fraud and defending against attacks on the bank and markets, Dimon said.

“Because you can be certain that the bad guys will be using it, too,” he said.

Dimon weighs in on geopolitics:

“War complicates geopolitics and materially adds risks.

…

The tensions of this war are also leading to the rethinking of many economic alliances, as well as trade and national security. All these factors create more risk and potentially higher inflation, and their confluence (along with inflation and QT) creates a somewhat unpredictable and dangerous outcome.”

The billionaire banker concludes that the current uncertainty “may be a once-in-a-generation sea change, with material effect.”

“Of course, there is always uncertainty. I am often frustrated when people talk about today’s uncertainty as if it were any different from yesterday’s uncertainty. However, in this case, I believe it actually is.

Less-predictable geopolitics, in general, and a complex adjustment to relationships with China are probably leading to higher military spending and a realignment of global economic and military alliances.

Higher fiscal spending, higher debt to gross domestic product (GDP), higher investment spend in general (including climate spending), higher energy costs and the inflationary effect of trade adjustments all lead me to believe that we may have gone from a savings glut to scarce capital and may be headed to higher inflation and higher interest rates than in the immediate past.

Essentially, we may be moving, as I read somewhere, from a virtuous cycle to a vicious cycle.”

And finally, Dimon makes it clear where he stands:

“lest anyone think that I’ve become a little soft, rest assured your CEO is a red-blooded, patriotic, free-enterprise and free-market capitalist.”

The headline remains clear:

“potential trouble brewing from unprecedented fiscal spending, quantitative tightening, and geopolitical tensions.”

Read all 32 pages of the JPMorgan CEO’s letter below: