Home Finance Jamie Dimon rips Fed stress test as ‘terrible way to run’ financial system

Jamie Dimon rips Fed stress test as ‘terrible way to run’ financial system

by Enochadmin

Jamie Dimon, CEO of JP Morgan Chase, talking on the Enterprise Roundtable CEO Innovation Summit in Washington, D.C. on Dec. sixth, 2018. 

Janvhi Bhojwani | CNBC

JPMorgan Chase CEO Jamie Dimon did not mince phrases when it got here to the regulatory course of that compelled his financial institution to droop its inventory buybacks.

Requested by veteran banking analyst Betsy Graseck of Morgan Stanley on Thursday concerning the Federal Reserve’s current stress check, Dimon unleashed a collection of critiques concerning the annual train, which was applied after the 2008 monetary disaster practically capsized the world’s financial system.

“We do not agree with the stress check,” Dimon mentioned. “It is inconsistent. It is not clear. It is too risky. It is mainly capricious, arbitrary.”

JPMorgan, the largest U.S. financial institution by belongings, is scrambling to generate extra capital to assist it adjust to the outcomes of the Fed check. Final month, steadily growing capital necessities inside the check hit the largest world monetary establishments, forcing the New York-based financial institution to freeze its dividend. Whereas Citigroup made an analogous announcement, rivals together with Goldman Sachs and Wells Fargo boosted investor payouts.

Below the examination’s hypothetical state of affairs, JPMorgan was anticipated to lose round $44 billion as markets crashed and unemployment surged, Dimon mentioned. He basically known as that determine bunk on Thursday, asserting that his financial institution would proceed to earn cash throughout a downturn.

After JPMorgan launched second-quarter outcomes, it disclosed a raft of different measures it’s taking to husband capital, together with by briefly halting share repurchases. That transfer, particularly, wasn’t welcomed by traders, because the inventory hasn’t been this low-cost in years.

Shares of the financial institution fell as a lot as 5%, hitting a recent 52-week low.

Large modifications

CFO Jeremy Barnum added to the dialog, saying that whereas regulators give loads of details about the contours of the annual examination, a key aspect of the so-called stress capital buffer does not get launched to banks, making it “actually very exhausting at any given second to know what’s truly driving it.”

“We really feel excellent about constructing [capital] rapidly sufficient to satisfy the upper necessities,” Barnum mentioned. “However they’re fairly massive modifications that come into impact pretty rapidly for banks, and I feel that is in all probability not wholesome.”

Different steps the financial institution has been compelled to take: JPMorgan is pulling again the capital dedicated to risky buying and selling operations known as “risk-weighted belongings,” in addition to lowering some types of deposits and dumping mortgages from its portfolio, based on Dimon.

A consequence of those strikes is that JPMorgan, a large establishment with a $3.8 trillion stability sheet, is compelled to withdraw credit score from the monetary system simply as storm clouds collect on the world’s largest financial system.

The actions occur to coincide with the Fed’s so-called quantitative tightening plans, which name for a reversal of the central financial institution’s bond-purchasing efforts, together with for mortgages, which may additional roil the market and drive up borrowing prices.

‘Making it worse’

The upshot is that the financial institution has to behave at “exactly the improper time lowering credit score to {the marketplace},” Dimon mentioned.

The strikes will finally influence peculiar People, notably lower-income minorities who sometimes have the toughest time acquiring loans to start with, he mentioned.

“It is not good for the USA financial system and particularly, it is dangerous for lower-income mortgages,” Dimon mentioned. “You have not mounted the mortgage enterprise after which we’re making it worse.”

Throughout a media name Thursday, Dimon informed reporters that whereas JPMorgan is not exiting the enterprise, the capital guidelines may power different banks to recede from residence loans solely. Wells Fargo has mentioned it will shrink the enterprise after surging rates of interest brought about a steep drop in quantity.

As an alternative, JPMorgan will originate mortgages, then instantly offload them, he mentioned.

“It is a horrible technique to run a monetary system,” Dimon mentioned. “It simply causes big confusion about what you have to be doing along with your capital.”

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