The US banking crisis “is not yet over,” the head of the biggest bank in the US said.
In an annual letter to shareholders, JPMorgan Chase CEO Jamie Dimon said this just a few weeks after two big US banks went bankrupt in a very public way.
He said he didn’t think the banking crisis would lead to a global crisis like 2008 because “there were fewer players and fewer issues.”
But he said the effects would last for a long time.
Mr. Dimon has worked for a long time on Wall Street. During the financial crisis of 2008, when bad home loans in the US caused problems worldwide, he was in charge of JPMorgan.
In the past few weeks, he worked with government officials to devise a plan to save California’s First Republic Bank, which many people thought was also about to fail.
In the short term, he said that the failures of Silicon Valley Bank and Signature Bank and the hasty takeover of Credit Suisse in Europe had caused “lots of jitters in the market” and were likely to cause lenders to pull back in the coming months, which would increase the chances of an economic recession.
But he said it needed to be clear if the banking crisis would affect regular consumers in the US, who are the main drivers of the world’s largest economy.
Last month, SVB went out of business because customers worried about its finances took out almost a quarter of its deposits in just a few days, which was more than the company could handle. The government shut down Signature because there were signs of a similar bank run.
Because of the banking crisis, people paid more attention to other companies that could be in trouble. This made Credit Suisse’s stock price go down, leading to a deal between Credit Suisse and UBS, a competitor.
Mr. Dimon said that the recent trouble should make regulators look more closely at the risks to banks that come from having a lot of deposits that aren’t insured or customers who are like SVB’s tech customers.
But he said that many of the risks were “hiding in plain sight,” like the sharp rise in interest rates last year, which hurt the value of some assets that banks usually hold. He said that regulators made a mistake by not considering the rise in rates when they tested the stability of banks.
When US President Joe Biden and others called for stricter rules for banks, he warned against “knee-jerk, whack-a-mole, or politically motivated responses.”
Is this a banking crisis? Do you need to worry?
Due to the banking crisis, UBS is taking over Credit Suisse. Both are big banks in Switzerland, but their investment banking departments do business worldwide.
Swiss banking is known for being the most stable, so Credit Suisse’s fall into uncertainty and its hasty marriage to UBS has left the Swiss with questions.
At the start of the banking crisis, two US banks, Silicon Valley Bank and Signature Bank, went out of business last month. The tech industry was important to both of these banks. But even though those are the biggest US bank failures since 2008, neither was anywhere near as big as Credit Suisse.
Even though no other banks have failed, central banks were worried enough to announce new steps to make more cash available so that financial transactions could go on as usual.
This is the kind of thing that was done at the start of the pandemic and during the financial crisis in 2008. Then, the goal was to boost confidence and ensure banks could still make loans and pay customers who wanted to get their money out.
Why must this happen right now?
Prior to the banking crisis, Credit Suisse had problems, like risk management mistakes that went back years, scandals it was involved in, like money laundering, and a big loss last year.
But it suddenly went downhill last week, even though the Swiss National Bank gave it an emergency lifeline of $50 billion (£41 billion), and its customers started moving their money to other banks.
Different things happened to the people who lost their jobs at US banks. Recent big drops in the value of cryptocurrencies hurt Signature, and when depositors rushed to get their money out, their balance sheets couldn’t handle it.
But all three and the banking business are affected by the same thing: sharply rising interest rates.
As a way for central banks to try to stop prices from increasing, the cost of borrowing has been increasing worldwide. This is a big surprise after many years of very low-interest rates.
Government bonds lose value when interest rates go up, so banks have found that their assets are suddenly worth less.
Read Also: Prosecutors probe UBS takeover of Credit Suisse
This has hurt all banks, but smaller banks are more likely to fail due to the banking crisis.
The biggest banks on Wall Street worked together to save First Republic, a bank in San Francisco specializing in technology. The US central bank, the Federal Reserve, said that the number of emergency loans to US banks had increased.
Opinions expressed by Texas Today contributors are their own.