Touchdown Jamie: Seven Points from Jamie Dimon’s Annual Shareholder Letter

Jamie Dimon’s annual letter to JPMorgan Chase shareholders has (rightfully) garnered a lot of attention. Here are my seven quick takeaways:

1. Banks are over-capitalized and it’s hurting the economy: The chart below shows 2016 CCAR losses – totaling $195b for all 33 CCAR banks – assuming they were each, individually, the worst performer during the next crisis. While this would never happen, the $195b in losses accounts for less than 10% of the $2.2t of capital in the banking system. Not only is the banking system over-capitalized, but it’s holding back the economy. Dimon argues, “had they been less afraid of potential CCAR stress losses, banks probably would have been more aggressive in making some small business loans, lower rated middle market loans and near-prime mortgages.”
2. America needs private capital in our housing market: The threat of DOJ litigation under the False Claims Act and the lack of national servicing standard have dramatically increased the cost to service a non-performing mortgage. The MBA estimates it cost $181 to service a performing mortgage in 2015, and $2,386 for a mortgage in default. Banks simply will not underwrite to a borrower with even a modest chance of default, as the cost to service is simply too high. Adverse consequences for the economy? JPM estimates that by making three changes: capital requirements on securitizations, reduced complexity of data delivery requirements, and define materiality standards for laws and regulations, could cut mortgage rates by 20 bps and increase annual purchase originations by $300b. If you assume that 3 million of these loans (or 20%) finance new home constructions, annual GDP could accelerate by .5%. No wonder the housing market recovery has been so slow!
3. Too big to fail has been addressed: Let’s make this very clear, the American taxpayer should not have to pay in the event of a bank failure. Instead shareholders, debtholders, and then the industry itself should be liable to pay for excess losses. To that end, Lehman would have $45b under today’s capital rules (vs. $23b in 2007). While unlikely to fail, if it did it would immediately be put into receivership, $120b in unsecured debt would immediately be converted into equity, and derivatives contracts would not be triggered. By the way, the Deposit Insurance Fund stood at $83.2b at 2016 year-end.
4. Adjusting SLR is common sense: On April 4th Dan Tarullo gave a departing speech at Princeton University, where he said the Volcker Rule “may be having a deleterious effect on market making, particularly for some less liquid issues.” I agree! It is clear regulators are having difficulty differentiating proprietary trading from market making. Do we fully understand the unintended consequences? Perhaps. However it’s clear dealer inventories are down on low risk assets due to higher capital requirements. I foresee a problem during the next panic.
5. 5. The Durable Data standard makes sense: The J.P. Morgan/Intuit partnership sets a strong model sharing customer data with third parties for three reasons: 1.) customers are able to share data how and when they want 2.) data is “pushed” to third-parties which protects the security of bank systems 3.) provides an ecosystem where tech companies can innovate and enhance the customer experience.
6. Incorporate CCAR’s qualitative component into the Fed’s routine supervision of banks: Again,
   to quote Mr. Tarullo “the time may be coming when the qualitative objection in CCAR should be phased out, and the supervisory examination work around stress testing and capital planning completely moved into the normal, year-round supervisory process, even for the G-SIBs.”  Qualitative CCAR failures are public and difficult to predict. The publicity does nothing to strengthen confidence in the U.S. financial system, “the widest, deepest, most transparent and best financial markets in the world.” Put the qualitative component back where it belongs; inside the Fed’s regular exam process!
7. Benefits to regulation should not outweigh costs: By some estimates, roughly $2 trillion or $15,000 per U.S. household is spent on regulations annually. Regulation is an oft cited reason for the decline in new business formation in United States. Most would agree some regulation is required to promote the common good. However it is important to note the unintended consequences that limit productivity and job creation which are crucial to driving future American growth.

What do you think? Let me know!