JPMorgan Chase (JPM) CEO Jamie Dimon, one of two bulge bracket bank CEOs remaining from the financial crisis, expects another crisis to hit markets. And this time, it could be worse for the customers, clients and communities relying on the banking system.
“There will be market panic again—and it won’t just affect banks—it will affect the entire financial marketplace,” Dimon wrote in the firm’s annual shareholder letter published on Tuesday.
Overall, Dimon’s letter had a positive tone about the US and its prospects. However, he thinks some things are holding the country back, including ineffective regulations.
Dimon warned that with the capital and liquidity rules as they stand right now, the banks would make it through the next market panic just fine, but other companies might not. He added that banks need to be able to be a defensive wall to help clients and not be constrained by regulations.
“Remember, banks were consistent providers of credit at existing prices into the crisis—the market was not,” Dimon wrote.
He continued (emphasis added): “During the crisis, many companies could not raise money in the public markets, many securities did not trade, securities issuances dropped dramatically and many asset prices fell to valuation levels that virtually anticipated a Great Depression. Last time around, banks—in particular (and I say with pride) our bank—stood by its customers to provide capital and liquidity that helped them survive. However, today’s capital and liquidity rules have created rigidity that will actually hurt banks’ ability to stand against the tide as they did during the Great Recession. This will mean that banks will survive the next market panic with plenty of cushion that could have been — but may not have been— used to help customers, companies and communities.”
In other words, everyone but the banks could be worse off during the next crisis. Dimon supports regulators having a means to prevent a situation from getting worse.
Send bad banks to the “Hall of Shame”
Dimon also supports the push for Chapter 14 bankruptcy and Title II resolution for failed banks. As he puts it, “A failed bank means the bank board and management are discharged, the equity is worthless, compensation is clawed back to the extent of the law and the bank’s name will forever be buried in the Hall of Shame.”
He went on: “One important point: Under both Chapter 14 and Title II, there might be a short-term need for the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve to lend money, in the short run with proper collateral, to a failing or failed institution,” he wrote. “This is because panic can cause a run on the bank, and it is far less painful to the economy if that bank’s assets are not sold in fire sales. This lending is effectively fully secured, and no loss should ever be incurred. Again, any loss that did occur would be charged back to all the banks. This also gives banks an enormous incentive to be in favor of a properly designed, safe and sound system.”
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Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.
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