Jamie Dimon called the Fed’s stress test a “terrible way to run” the financial system
Jamie Dimon, CEO of JP Morgan Chase, speaks at the Business Roundtable CEO Innovation Summit in Washington, DC on December 6, 2018.
Janvi Bhojwani | CNBC
JPMorgan Chase CEO Jamie Dimon didn’t mince words when it came to the regulatory process that forced his bank to suspend share buybacks.
Asked by seasoned banking analyst Betsy Grasek at Morgan Stanley on Thursday about the Federal Reserve’s recent stress test, Dimon issued a series of critiques of the annual test that came after the 2008 financial crisis nearly upset the global economy.
“We disagree with the stress test,” Dimon said. “It’s inconsistent. It’s opaque. It’s too volatile. It’s mostly capricious, arbitrary.”
JPMorgan, the largest US bank by assets, is struggling to raise more capital to match the Fed’s test results. Last month, steadily rising test capital requirements hit the world’s largest financial institutions, forcing a New York bank to freeze its dividends. While Citigroup made a similar announcement, competitors including Goldman Sachs and Wells Fargo have increased their payouts to investors.
According to the hypothetical exam scenario, JPMorgan should have lost about $44 billion due to market crashes and rising unemployment, Dimon said. In fact, he called the number a bunk on Thursday, arguing that his bank would continue to make money during the economic downturn.
After JPMorgan released its second-quarter results, it revealed a host of other measures it is taking to save capital, including by temporarily halting share repurchases. The move, in particular, was not welcomed by investors as the stock hadn’t been this cheap in years.
The bank’s shares fell 5%, hitting a new 52-week low.
Big changes
CFO Jeremy Barnum added to the conversation by saying that while regulators provide a lot of information about the contours of the annual exam, a key element of the so-called stress capital buffer is not passed on to banks, making it “very difficult indeed.” at any moment to understand what’s really driving it.”
“We are very good at building [capital] fast enough to meet higher demands,” Barnum said. “But these are pretty big changes that are coming into effect pretty quickly for banks, and I think that’s probably not a good thing.”
Other steps the bank has been forced to take include: JPMorgan is withdrawing capital earmarked for volatile trading operations, called “risk-weighted assets,” and is also cutting some forms of deposits and getting rid of mortgages from its portfolio, Dimon said.
The consequence of these moves is that JPMorgan, a large institution with a balance sheet of $3.8 trillion, is forced to withdraw the loan from the financial system as soon as Thunderclouds are gathering over the world’s largest economy.
The move coincides with the Fed’s so-called quantitative tightening plans, which call for a curtailment of the central bank’s efforts to buy bonds, including mortgages, which could further rattle the market and raise borrowing costs.
“Make It Worse”
As a result, the bank has to act “at exactly the wrong time to reduce credit in the market,” Dimon said.
These moves will ultimately impact ordinary Americans, especially low-income minorities, who typically have the hardest time getting loans, he said.
“This is bad for the United States economy and bad for low-income mortgages in particular,” Dimon said. “You didn’t get the mortgage business going, and then we make it even worse.”
During a press conference on Thursday, Dimon told reporters that while JPMorgan is not going out of business, capital rules could force other banks out of mortgages altogether. Wells Fargo said it would cut the business after rising interest rates led to a sharp drop in volumes.
Instead, JPMorgan will issue mortgages and then immediately dispose of them, he said.
“It’s a terrible way to run the financial system,” Dimon said. “It just causes a huge amount of confusion about what you should be doing with your capital.”
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