Jamie Dimon rips Fed stress test as ‘terrible way to handle’ financial system
Jamie Dimon, CEO of JP Morgan Chase, speaking at the Business Roundtable CEO Innovation Summit in Washington, DC on December 6, 2018.
Janvhi Bhojwani | CNBC
JPMorgan Chase CEO Jamie Dimon didn’t mince words about the regulatory process that forced his bank to suspend its share buybacks.
Asked by veteran banking analyst Betsy Graseck of Morgan Stanley on Thursday about the Federal Reserve’s recent stress test, Dimon launched a series of criticisms of the annual exercise, which was implemented after the 2008 financial crisis. nearly capsized the global economy.
“We disagree with the stress test,” Dimon said. “It’s incoherent. It’s not transparent. It’s too volatile. It’s fundamentally capricious, arbitrary.”
JPMorgan, the largest U.S. bank by assets, is scrambling to raise more capital to help it comply with the Fed’s test results. Last month, steadily rising capital requirements under the test hit the world’s biggest financial institutions, forcing the New York-based bank to freeze its dividend. While Citigroup made a similar announcement, rivals such as Goldman Sachs and Wells Fargo increased investor payouts.
Under the review’s hypothetical scenario, JPMorgan was expected to lose about $44 billion as markets crashed and unemployment rose, Dimon said. He basically called that figure overlay on Thursday, saying his bank would continue to make money in a downturn.
After JPMorgan released its second-quarter results, it disclosed a series of other steps it is taking to manage capital, including temporarily halting share buybacks. This move, in particular, has not gone down well with investors, as the stock hasn’t been this cheap in years.
Shares of the bank fell nearly 5%, hitting a new 52-week low.
Chief Financial Officer Jeremy Barnum added to the conversation, saying that while regulators are giving lots of information about the contours of the annual review, a key part of the so-called stress capital buffer is not being communicated to banks, which which makes it “really very difficult at any time to understand what really drives him.”
“We feel very good about the idea of building [capital] fast enough to meet the 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 healthy.
Other actions the bank has been forced to take: JPMorgan is removing capital spent on volatile trading operations called “risk-weighted assets,” as well as cutting certain forms of deposits and dumping mortgages from its portfolio. , according to Dimon.
One consequence of these measures is that JPMorgan, a massive institution with a balance sheet of $3.8 trillion, is being forced to withdraw its credits from the financial system just as storm clouds are gathering over the largest economy in the world.
These actions coincide with the Fed’s so-called quantitative tightening plans, which call for a reversal of the central bank’s bond-buying plans, including for mortgages, which could further disrupt the market and cause raise borrowing costs.
“Make It Worse”
The result is that the bank must act at “precisely the wrong time to reduce credit to the market,” Dimon said.
The measures will ultimately impact ordinary Americans, especially low-income minorities who typically have the hardest time getting loans to begin with, he said.
“It’s not good for the US economy and in particular it’s bad for low-income mortgages,” Dimon said. “You haven’t fixed the mortgage industry and we’re making it worse.”
On a media call Thursday, Dimon told reporters that even if JPMorgan does not pull out of the business, capital rules could force other banks to forgo home loans entirely. Wells Fargo said it would scale back activity after soaring interest rates caused a sharp drop in volume.
Instead, JPMorgan will create mortgages and then discharge them immediately, he said.
“It’s a terrible way to run a financial system,” Dimon said. “It just creates huge confusion about what you should be doing with your capital.”