The macroclimate is moving from “a virtuous cycle to a vicious cycle,” according to Jamie Dimon.
He isn’t alone with his prediction of a challenging, even dire, economy ahead, with the World Bank separately warning March 29 of a lost decade for global growth coming into view, stating in a lengthy report that, “nearly all the forces that have powered growth and prosperity since the early 1990s have weakened.”
While the D.C.-based World Bank sees the war in Ukraine, the COVID-19 pandemic, and high inflation compounding existing structural challenges, Dimon uses his 43-page letter to investors to highlight the impact of regulation and technology on J.P. Morgan’s business and the global banking landscape going forward.
The current banking crisis, Dimon said, is largely unrelated to the 2008 global financial crisis as it “involves far fewer financial players and fewer issues that need to be resolved.”
That doesn’t mean that its effects won’t continue to be felt.
The head of one of the world’s largest banks, Dimon said he sees titanic institutions like his playing a smaller role in the global financial system going forward.
The reason? According to the J.P. Morgan chief, it’s the “increasing role and size of shadow banks,” a trend which he expects to continue.
“The new reality is that some things — for example, holding certain types of credit — are more efficiently done by a nonbank,” he wrote, noting that regional banks “simply cannot” manage the scale and complexity of certain transactions.
Still, Dimon took time to emphasize that many emergent “shadow banks” may not step in to help their clients during challenging economic periods, going so far as to call them “fair-weather friends.”
Dimon highlighted the impact of the financial sector’s ongoing digital transformation as eating away at the market share of traditional institutions. Large technology companies are already 100% digital and have hundreds of millions of customers, as well as enormous resources, in data and proprietary systems.
All of this gives them an extraordinary competitive advantage Dimon said, using Apple as an example of how tech businesses can profitably and successfully offer banking-type services to their sizable consumer audiences as well as move into other similar services such as payment processing, credit risk assessment, peer-to-peer- (P2P) payment systems, merchant acquiring and buy now, pay later (BNPL) offers.
Dimon’s letter devoted significant space to his view on potential federal regulations that may emerge in response to the banking turmoil, with the J.P. Morgan chief writing that, “simply satisfying regulatory requirements is not sufficient” and adding that any new regulations should be designed to “keep America’s banking system the best in the world.”
“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 wrote. “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.”
Still, the bank leader cautioned about throwing the “baby out with the bath water,” emphasizing the importance of avoiding “knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended.”
Dimon, whose bank is reportedly one of two major lenders on the hook for footing the $23 billion SVB crisis bill, noted that nearly all of the risks with SVB were “hiding in plain sight,” and that any recent change in regulatory requirements would hardly have made a difference given scenario gaps in the Federal Reserve Board’s stress testing requirements.
“[T]his wasn’t the finest hour for many players,” Dimon said.
Dimon’s view on artificial intelligence (AI) and its potential served as a bright spot in the letter, as he revealed that his bank has “more than 300 AI use cases in production today,” adding that, “AI runs throughout our payments processing and money movement systems across the globe.”
He noted that AI is “an absolute necessity” and emphasized the importance of implementing new technologies as “you can be certain that the bad guys will be using it too.”