Yahoo Finance JPM's Dimon: Let's avoid 'whack-a-mole' response to SVB banking crisis
JPMorgan Chase CEO Jamie Dimon told shareholders in his annual letter that it's unlikely that tighter regulations would have stopped the deposit run at Silicon Valley Bank
JPMorgan Chase (JPM) CEO Jamie Dimon said in his annual letter to shareholders that it's unlikely that tighter regulations would have stopped the sudden deposit outflow that sank Silicon Valley Bank, urging caution as federal officials consider how oversight of the industry should change in the wake of the second-largest bank failure in U.S. history.
"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 said.
Most of the risks now roiling the banking world, he said, were "hiding in plain sight," including the effect that rising interest rates would have on bonds banks hold as investments. The sudden flight of depositors from Silicon Valley Bank, including $42 billion in one day, was "an unknown risk" and "it is unlikely that any recent change in regulatory requirements would have made a difference in what followed."
The California lender was seized by regulators on March 10, setting off a panic that required a pledge from federal regulators to cover all depositors at Silicon Valley Bank as well as Signature Bank, which was seized on March 12. Small banks across the country lost more than $100 bullion in deposits over the course of one week before the situation stabilized.
The CEO’s comments in his 43-page letter released Tuesday come the week after President Biden asked federal banking regulators to tighten some of the rules loosened at the end of last decade for regional banks, forcing institutions the size of the failed Silicon Valley Bank to hold more liquid assets while undergoing more frequent stress tests. The Federal Reserve is reviewing what changes can be made.
Dimon spread responsibility for the fall of Silicon Valley Bank, attributing it to a series of "colliding factors" ranging from the sharp rise in interest rates to incentives banks have from regulators to hold government securities, which are considered liquid and safe. Stress tests administered by the Fed, he added, "never incorporated interest rates at higher levels."
"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.
Dimon said "the current crisis is not yet over" and "there will be repercussions from it for years to come." But he also said that it is not like what happened in 2008, when mortgages held by financial institutions around the world went bad.
"This current banking crisis involves far fewer financial players and fewer issues that need to be resolved," he said.
He noted, however, that the bank failures "have significantly changed the market’s expectations" as "the market's odds of a recession have increased."
Dimon has played his own part in the chaos of the past month, helping to organize a joint effort by 11 banks to rescue beleaguered San Francisco lender First Republic (FRC) with $30 billion of uninsured deposits. The infusion followed a steep drop in the shares of First Republic, which was the nation's 14th-largest bank as of Dec. 31 with $212 billion in assets.
That placed Dimon at the center of a national banking crisis for the second time in 15 years.
In 2008, he acted twice to help stabilize the financial system when JPMorgan Chase purchased New York investment bank Bear Stearns in March of that year, getting a $29 billion backstop from the federal government, and then Seattle’s Washington Mutual in September of 2008. In the case of Washington Mutual, JPMorgan Chase purchased its operations after regulators seized the Seattle thrift. It still is the nation’s largest-ever bank failure.
The two deals turned JPMorgan Chase into the nation’s biggest coast-to-coast bank and provided it with an even more powerful hand on Wall Street. They also saddled it with years of legal and regulatory headaches. Dimon has said if he could do it over again he would not have purchased Bear Stearns for those reasons.
In his letter Tuesday, Dimon argued that regional, midsize and community banks need to be strengthened and that giant banks should also continue to play a critical role. He repeatedly asked that regulators carefully consider their reaction to the current situation.
"It should be noted that regulations, the supervisory regime and the resolution regime currently in place did not stop SVB and Signature Bank from failing — and from causing systemwide issues,” he said. "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. We should carefully study why this particular situation happened but not overreact."
Click here for the latest stock market news and in-depth analysis, including events that move stocks
Read the latest financial and business news from Yahoo Finance
