Revisiting a theme from earlier letters, Jamie Dimon of JPMorgan Chase expresses concern about the growing size and influence of “shadow banks,” fintechs, big techs and other nonbanks versus the shrinking size of the regulated banking industry.
This trend continues, as illustrated in an updated version of a table he’s used in past reports.
|$ in trillions||2010||2022|
|SIZE OF BANKS IN THE FINANCIAL SYSTEM|
|Total U.S. debt and equity market||$57.5||$123.2|
|Total U.S. broker-dealer inventories||$4.1||$4.4|
|U.S. G-SIB market capitalization||$0.8||$1.2|
|U.S. bank loans||$6.6||$12.1|
|U.S. bank liquid assets2||$2.8||$7.5|
|Federal Reserve total assets||$2.4||$8.6|
|Federal Reserve RRP volume||$<0.1||$2.6|
|Hedge fund and private equity AUM3||$2.8||$9.0|
|Top 50 sovereign wealth fund AUM4||$3.6||$10.3|
|Total private direct credit5||$14.0||$22.0|
|U.S. money market funds6||$3.0||$5.2|
|U.S. private equity-backed companies (K)7||6.0||11.2|
|U.S. publicly listed companies (K)8||1996 – 7.3||4.2||4.6|
|Nonbank share of mortgage originations9||9%||62%|
|Nonbank share of leveraged lending||2000 – 54%||82%||75%|
Sources: FactSet, S&P Global Market Intelligence, Assets and Liabilities of Commercial Banks in the United States H.8 data, Financial Accounts of the United States Z.1 data, World Federation of Exchanges, Pitchbook, Preqin and World Bank
AUM = Assets under management GDP = Global domestic product G-SIB = Global Systemically Important Banks RRP = Reverse repurchase agreements K = Thousands
Footnotes refer to the original JPMorgan Chase annual shareholders letter footnote section. You can access it here
Nonetheless, Dimon does see areas where banking might want to cede ground. “Some credit is better held in a nonbank,” he argues. “Increasingly, for a credit relationship to make sense, banks need a lot of noncredit-related revenue.”
He cites mortgages as an example, saying the high cost of originating mortgages and complying with regulations and the lack of “a healthy securitization market” have made it harder for banks to remain in that sector.
But, even without those factors, mortgages are a poor bargain for banks today, Dimon argues.
“If you buy or create a loan at par and put it on your balance sheet at par (think of a mortgage) and internally finance it, even match-funded with 10% capital, you might believe you have a 12% return,” says Dimon. But to him, such a loan has no franchise value.
“It is only worth par, and, in fact, a small change in that value (because of interest rates and credit spread) could mean that you have made a huge mistake,” he says. Building a broader relationship around the bread-and-butter loan is what creates franchise value, he adds.
“Simply taking interest rate risk (which contributed to the downfall of SVB) is not a business. Nor is simply taking credit risk. One person and a computer will suffice — you do not need 290,000 people circling the globe to do that.”
— Jamie Dimon, JPMorgan Chase
One last thought from Dimon, plucked from a wide-ranging discussion, is his broader take on all the risks facing banks these days. After discussing the impact of the war in Ukraine, worrisome economic trends and more, he writes: “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.”