I’ve been reading Jamie Dimon’s letter to JPMorgan Chase shareholders for the past two (long) days and wanted to share a little bit about what happened to the banking system this spring. He is in a unique position to share his perspective on…
The recent failures of Silicon Valley Bank (SVB) in the US and Credit Suisse in Europe, and the associated stress on the banking system, highlight that simply meeting regulatory requirements is not enough. Risks are numerous and as the world evolves, managing these risks requires constant and careful scrutiny. With regard to the current turmoil in the U.S. banking system, most of the risks are It’s hidden in front of you. The interest rate exposure, the fair value of the held-to-maturity (HTM) portfolio and the amount of SVB’s uninsured deposits have always been known to both regulators and the market. The unknown risk was that SVB’s more than 35,000 corporate clients (and activities within them) were managed by a handful of venture capital firms whose deposits moved in lockstep. Recent changes in regulatory requirements are unlikely to affect subsequent changes. Instead, the recent sharp rise in interest rates has focused attention on the potential for a rapid decline in the fair value of the HTM portfolio and, in this case, the lack of stickiness of certain uninsured deposits. Ironically, banks were motivated to own very safe government bonds. This was because it was considered by regulators to be highly liquid and had very low capital requirements. To make matters worse, the scenario stress tests devised by the Federal Reserve (Fed) did not incorporate higher interest rates. This is not to exempt bank management. This is to make clear that it wasn’t the best time for many players. All of these conflicting factors became very important when the market, rating agencies and depositors took notice.
Bold is him, not me.
In the financial system, risks are often hidden in plain sight. potential Most of the time there are risks. When they move from potential risk to actual risk, it can be abrupt and the impact is not always apparent even when focusing on them or watching them in real time.
Much has been written about the uniqueness of the SVB problem. Financial stocks he fell nearly 10% in March and the banking industry group fell 19% his. If Jaime is correct, this could present an opportunity for investors willing to bet that recent concerns have been exaggerated. A friend of mine, Brian Belski of his BMO, issued a note this morning suggesting just that. He says his 44% of financial sector stocks on the S&P 500 rank as high quality above the historical average. In addition, financial sector stocks are expected to see a 9% increase in dividends over the next 12 months, which is his second highest figure among all sectors. Worth considering.
Read the rest of the letter from Ser Jaime here: