Every year, the CEO of the nation’s largest bank writes a fat shareholder letter full of observations, warnings and prescriptions for banking and the economy. This time around Jamie Dimon’s words come on the heels of a crisis that gripped New York City, Silicon Valley and Washington in an intense drama and caused shudders from Wall Street to Main Street. Dimon doesn’t disappoint.
Accounting rules. Federal stress tests. “Whack-a-mole” legislation. In his annual letter to shareholders, JPMorgan Chase Chairman and Chief Executive Jamie Dimon does a lot of griping about what ails the banking industry.
But he also proposes a detailed nine-point plan he believes would improve the industry and the way it is regulated, even as forces gather in Washington to tighten the vise.
Dimon makes a pointed diagnosis of the latest banking crisis, including his view that “most of the risks were hiding in plain sight,” and warns of more fallout. “There will be repercussions from it for years to come,” he says.
He slams accounting rules that, he argues, violate common sense and drive poor decisions, and federal stress tests that, he says, offer little value, provide a false sense of security and fail to account for blatant risks like rapidly rising interest rates.
The head of America’s largest bank continues his crusade against shadow banking, but with a twist. He offers a suggestion some might find heretical. He now contends that the industry should consider ceding some activities to nonbank competitors, citing mortgage lending as one example.
Dimon’s much-anticipated shareholder letters are lengthy, with the latest one taking up 43 pages in JPMorgan Chase’s annual report. Much of the letter concerns his company specifically, but the industry looks to his broader messages much as a state-of-the-industry speech — the banking industry’s answer to Warren Buffet’s popular investment outlooks in Berkshire Hathaway annual reports.
Dimon’s blunt annual missive has become required reading across the industry, though with the angst of the March bank-run crisis still fresh, his usual direct approach is at times a little more diplomatic. Here’s a summary of what he had to say on the crisis and other current banking affairs.
Dimon Diagnoses the Debacle: Not the ‘Finest Hour’
As Democrats in Congress and the Biden administration begin to press for tighter regulation of the banking industry, Dimon begins his extensive discussion of the crisis with a reality check: “The recent failures of Silicon Valley Bank 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.”
Managing them, but not necessarily detecting them.
In the latest crisis, “most of the risks were hiding in plain sight,” he writes. “Interest rate exposure, the fair value of held-to-maturity portfolios and the amount of SVB’s uninsured deposits were always known — both to regulators and the marketplace.”
Dimon says that “the unknown risk” lay in the behavior of more than 35,000 SVB clients, who were heavily concentrated in the tech startup sector and, as such, were controlled by a handful of venture capital companies.
Dimon says he doubts any regulatory changes could have altered how those events unfolded (as some in Washington contend).
“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 says, adding that Federal Reserve stress tests never incorporated the impact of higher interest rates on those securities holdings. “This is not to absolve bank management — it’s just to make clear that this wasn’t the finest hour for many players.”
Dimon takes pains to distinguish the recent turmoil from the 2007-2008 financial crisis. Back then, $1 trillion in home mortgages, owned by many types of companies globally, were about to go bad, and many firms failed as a result. The current crisis involved far fewer companies and fewer issues to resolve, he says.
He also objects to any suggestion that big banks gained in the crisis, saying that damaged trust hurt all banks:
“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.”
— Jamie Dimon, JPMorgan Chase
Dimon: Not a Time for ‘Whack-A-Mole’ Washington Responses
The crisis offers lessons that will lead to changes in the regulatory system and those should be weighed carefully, Dimon writes in the letter.
“It is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended,” he says.
“The debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world.”
The main elements that Dimon thinks should be included in the mix are:
- Capital and leverage ratios.
- Liquidity — and what counts as liquidity.
- Rules for resolving failed and failing institutions.
- Deposit insurance, including the status and treatment of uninsured deposits.
- Securitization.
- Stress testing.
- Proper use of the Federal Reserve’s discount window.
- Tailoring of regulation to bank size and other factors.
- Customer concentrations.
- Limitations on the use of held-to-maturity portfolios.
Read More: SVB Post-Mortem: Communications Lessons Amid the Collapse
Crisis Cure? Dimon Prescribes a 9-Point Plan
Dimon also presents an outline of what he thinks is needed to prevent future banking crises.
Here are some highlights from that discussion:
• “We want proper transparency and strong regulations.”
“We should not aim for a regulatory regime that eliminates all failure, but one that reduces the chance of failure and the odds of contagion,” Dimon says. [Emphasis added.] He favors a detailed study of the latest crisis, but cautions against a regulatory overreaction to the contributing factors.
• “We should want a system in which a bank failure does not cause undue panic and financial harm.”
“While you don’t want banks to fail all the time,” Dimon says, “it should be allowed to happen, and the resolution should follow a completely prescribed process.”
Historically, uninsured depositors do not lose money in a bank failure, as evidenced by the outcome of nearly all bank failures, he says. “But the very fear of loss can cause a run on any bank,” especially those with characteristics similar to a bank that has failed.
The banking industry funds the regulatory system and deposit insurance. “And yes,” Dimon says, “while these costs are ultimately passed on to their customers — that is true for all industries — the cost is just the price of implementing proper regulations.”
• “We should decide a priori what should stay in the regulatory system and what shouldn’t.”
By this Dimon means choosing which activities fall under the traditional regulatory umbrella and which don’t. He says definitive decisions should be made.
One example: Should the mortgage business be inside the banking system or outside of it?
• “Regulation, particularly stress testing, should be more thoughtful and forward looking.”
The stress tests are limited in value and tedious, and can give risk managers a false sense of confidence, Dimon complains. “It has become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s.”
• “We need banks to be there for their clients in tough times.”
Dimon says that some regulations and accounting standards “have become too procyclical and make it harder to do this.”
In supporting another of his nine points, Dimon accuses many “shadow banks” of being “fair weather friends” that don’t step up for clients in tough times.
A summary of Jamie Dimon’s 9-point plan
Saying “we should have common goals on how we want the banking system to work,” Dimon suggests the following in his annual shareholder letter:
1. We want to strengthen regional, midsized and community banks, which are essential to the American economic system.
2. We need large, complex banks to continue to play a critical role in the U.S. and global financial system.
3. We should want a system in which a bank failure does not cause undue panic and financial harm.
4. We want proper transparency and strong regulations.
5. We should want market makers to have the ability to effectively intermediate.
6. We need banks to be there for their clients in tough times.
7. Regulation, particularly stress testing, should be more thoughtful and forward looking.
8. We should decide a priori what should stay in the regulatory system and what shouldn’t.
9. We need banks to be attractive investments.
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