Jamie Dimon says the banking crisis is not over and will cause 'repercussions for years to come'
Comment of the Day

April 04 2023

Commentary by Eoin Treacy

Jamie Dimon says the banking crisis is not over and will cause 'repercussions for years to come'

This article from CNBC may be of interest. Here is a section: 

"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. 

The JPMorgan CEO instead called for more forward-looking regulation. He pointed out that the held-to-maturity bonds that have become problems for many banks are actually highly rated government debt that scores well under current rules, and that recent stress tests did not game out a rapid rise in interest rates. 

"This is not to absolve bank management – it's just to make clear that this wasn't the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them," Dimon wrote.

He 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. 

Eoin Treacy's view

Too often financial sector regulation focuses on placating retail investors who lost money in a crash. However, that does not negate the fact that commercial banking is a different business than investment banking. One is conservative and the other is based on risk taking. Merging them supplies the risk takers with a large base for leverage. That has allowed banks to balloon in size over the last twenty years. There is no appetite to reverse the process so tighter scrutiny of leverage mismatches need to be implemented and not least because government bonds were never risk free.

10-year yields continue to contract as the economy slows and inflationary fears morph into deflationary fears. That should at least improve the value of held to maturity assets on bank balance sheets but it raises the spectre of lower loan demand growth and/or lower credit quality borrowers at the same time.
The S&P500 Banks Index has failed to rebound and turned lower again today. The classic way to recapitalise the banking sector is with a sharply steeper yield curve spread. That would imply several hundred basis points of interest rates cuts which is only likely during a significant growth shock.  

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