JPMorgan Chase’s CEO sees potential risks from private credit and sweeping changes resulting from AI.
In his annual letter to shareholders, published Monday (April 6), Jamie Dimon addressed private credit, an industry attracting regulatory attention recently due to concerns about liquidity, transparency and lending discipline.
Dimon said private credit probably isn’t a systemic risk in “grand scheme of things,” noting that its nearly $2 trillion size is dwarfed by the market size of investment grade bonds and residential mortgages and securities, both of which are $13 trillion.
“I do believe that when we have a credit cycle, which will happen one day, losses on all leveraged lending in general will be higher than expected, relative to the environment,” the letter continued. “This is because credit standards have been modestly weakening pretty much across the board.”
The CEO added that private credit doesn’t typically have “great transparency or rigorous valuation ‘marks’ of their loans,” which raises the likelihood that people will sell if they believe the environment will worsen, “even if actual realized losses barely change.”
Dimon added that actual losses are “already a little higher than they should be relative to the environment” and predicted that insurance regulators will eventually insist on stricter ratings or markdowns, which will likely bring about demands for more capital.
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As covered here in March, the debate around private credit has intensified recently as bank filings and executive commentary underline the sector’s size and potential vulnerabilities.
This asset class exists largely outside the transparency standards applied to traditional banking or public debt markets. Loans are typically held in private portfolios and valued internally by the funds which originate them, something that can hide deteriorating credit conditions until stress becomes impossible to overlook.
“The overarching concern may not herald an imminent crisis, but the structure of the market could amplify shocks if credit conditions deteriorate,” PYMNTS wrote.
Dimon’s letter also addressed artificial intelligence (AI), which he said would “affect virtually every function, application and process in the company.”
He also touted its promise, envisioning a world where the technology cured cancer and ushered in a shorter work week, but also said it was unclear how AI will develop.
“There will be a wide variety of AI models — open and closed, large and small — and no single tool will dominate,” Dimon said. “Overall, the investment in AI is not a speculative bubble; rather, it will deliver significant benefits. However, at this time, we cannot predict the ultimate winners and losers in AI- related industries.”
