The U.S. economy may be entering a favorable post-Covid “Goldilocks moment,” in the words of JPMorgan Chase Chairman and CEO Jamie Dimon. However, the traditional banking industry faces a continuing significant challenge as a combination of fintech, big tech and shadow banking players continue to build market share under favorable regulatory conditions.
In recent years Dimon’s annual letter to shareholders has become a bully pulpit for the head of America’s largest bank in which he tackles the financial, economic and social conditions of the day and how they will impact the banking industry, and Chase in particular. The letter has become as anticipated as Warren Buffet’s shareholder letter and Jeff Bezos’ letter to Amazon shareholders, noteworthy because the three have become friends over the years.
Dimon’s overall economic view is upbeat, but shadowed by his concerns about social inequities and other ills. One section comprises a long list of U.S. problems that need fixing.
The far-ranging letter for 2020, which could actually be published as a small book, includes a very dark outlook for traditional banking. He also calls upon private industry to take more initiative to cooperate to improve the overall lot of society and he criticizes many in business for selfishness.
“We all deserve our share of the blame for using the balkanized government, bureaucracy and lack of transparency to further our own interests — not necessarily the country’s,” says Dimon.
A ‘Goldilocks’ Recovery Is a Strong Possibility
In terms of the economic outlook, Dimon expects a boom.
“I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE (quantitative easing), a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom,” Dimon writes. “This boom could easily run into 2023.”
“We don’t know what the future holds and it is possible that we will have a Goldilocks moment — fast and sustained growth, inflation that moves up gently (but not too much) and interest rates that rise (but not too much),” says Dimon. “A booming economy makes managing U.S. debt much easier and makes it much easier for the Fed to reverse QE and begin raising rates – because doing so may cause a little market turmoil, but it will not stop a roaring economy.”
What to Watch:
Dimon worries that more trouble is in the offing. New variants of Covid-19 could blow up an improving economy. Inflation may not be temporary and could ramp up rapidly, forcing the Federal Reserve to jack up rates.
( Read More: Fintech Lenders Will Come Roaring Back As Economy Re-Opens )
Financial Evolution Is Leaving Traditional Institutions Behind
Dimon devotes a major section of the letter to the rapidly growing impact of new competition. In early 2020 Dimon said in an off-the-cuff answer to a stock analyst’s question that banks should be “scared shitless” by fintech. Dig Deeper
Dimon’s remarks in the letter can be seen as a detailed explanation of that earlier comment.
“Banks already compete against a large and powerful shadow banking system. And they are facing extensive competition from Silicon Valley, both in the form of fintechs and big tech companies (Amazon, Apple, Facebook, Google and now Walmart), that is here to stay,” Dimon writes. “As the importance of cloud, AI and digital platforms grows, this competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system.” [Emphasis added.]
(In the table further on Dimon fleshes out the meaning of “shadow banking,” to include bank-like activities by hedge funds, money market funds, assets under management by private equity firms and more.)
Dimon’s citing Amazon as a threat is interesting because Chase is a major supplier of Amazon-branded credit card accounts.
In the recent past, Chase was often the rumor mill’s choice of partner for the yet-to-be-seen “Amazon Checking.” Meanwhile, a handful of banks and credit unions, most notably Citibank, are teaming up with Google for its Google Plex accounts.
Dimon urges legislators and regulators to understand that the U.S. traditional financial system is the “best the world has seen” and that preserving that excellence requires a level playing field with the newcomers in order to remain vibrant.
He uses a table, reproduced below, to make his point that banks are playing an increasingly smaller role in the financial system, with the change accelerating.
Size of the Financial Sector/Industry
|$ in trillions||2000||2010||2020|
|SIZE OF BANKS|
|U.S. banks market capitalization1||1.2||1.3||2.2|
|U.S. GSIB market capitalization||0.9||0.8||1.2|
|European banks market capitalization1||1.1||1.5||1.1|
|U.S. bank loans2||3.7||6.6||10.5|
|Total U.S. broker dealer inventories||2||3.5||3.7|
|U.S. bank common equity3||0.4||1||1.5|
|U.S. bank liquid assets2,4||1.1||2.8||7|
|Total U.S. debt and equity market||33.6||57.2||118.4|
|Total U.S. GDP5||13.3||15.8||18.8|
|Total private direct credit||7.6||13.8||18.4|
|Total U.S. passives and ETFs6||6.9||13.6||30.8|
|Toal U.S. money market funds||1.8||2.8||4.3|
|Hedge fund and private equity AUM7||0.6||3||8|
|SIZE OF EVOLVING COMPETITORS|
|Google, Amazon, Facebook, Apple8||NM||0.5||5.6|
|Private and public fintech companies9||NA||NA||0.8|
Table source: JPMorgan Chase 2020 Annual Report
Data sources: FactSet, S&P Global Market Intelligence, Federal Reserve Z.1, Federal Reserve H.8, Preqin and Federal Reserve Economic Date (FRED)
GSIB = Global Systemically Important Banks NA = Not applicable NM = Not material
Footnotes refer to the original JPMorgan Chase annual shareholders letter footnote section. You can access it at https://tinyurl.com/JPMC2020ShareholderLetter
- Do Fintechs Scare You As Much As They Do These CEOs?
- Fintech Buys Bank in Pursuit of Radical New Business Model
- Digital Lending Requires Speed and Simplicity to Win Battle With Fintechs
- How Fintechs and Social Changes Are Radically Reshaping Banking
“It is completely clear that, increasingly, many banking products, such as payments and certain forms of deposits among others, are moving out of the banking system,” according to Dimon. “In addition, lending in many forms —including mortgage, student, leveraged, consumer and non-credit card consumer — is moving out of the banking system.”
He adds that, “Neobanks and nonbanks are gaining share in consumer accounts, which effectively hold cash-like deposits. Payments are also moving out of the banking system, in merchant processing and in debit or alternative payment systems.”
To support his contention that newcomers enjoy a regulatory advantage, Dimon offered the table below. “I know I will be accused of complaining about bank regulations,” says Dimon, “but I am simply laying out the facts for our shareholders in trying to assess the competitive landscape going forward.”
Bank and Nonbank Regulation Requirements
|1.||Higher capital requirements (which also require expensive debt and non-tax-deductible preferreds), even on deposits||Lower capital requirements, set by market|
|2.||Operational risk capital||No operational risk capital|
|3.||Extensive liquidity requirements||No liquidity requirements|
|4.||FDIC insurance (this cost JPM ~$12B over the last 10 years – and not tax deductible beginning in 2018)||No FDIC insurance|
|5.||U.K. bank levy and surcharges (this cost JPM $3.2B over the last 10 years)||No U.K. bank levy or surcharges|
|6.||More costly regulations (e.g., loans, CFPB, OCC), including resolutions planning and CCAR||Less costly regulations|
|7.||Heavy restrictions around privacy and use of data||Fewer privacy restrictions, virtually no data restrictions|
|8.||Extensive KYC/AML requirements||Less extensive KYC/AML requirements|
|9.||Substantial social requirements (CRA)||No social requirements (CRA)|
|10.||Extensive public and regulatory reporting requirements (e.g., disclosure, compensation)||Limited public and regulatory reporting requirements|
|11.||Lower revenue opportunities (i.e., Durbin – this cost JPM ~$17B over the last 10 years)||Higher debit card income|
Source: JPMorgan Chase 2020 Annual Report
FDIC = Federal Deposit Insurance Corporation CFPB = Consumer Financial Protection Bureau
OCC = Office of the Comptroller of the Currency CCAR = Comprehensive Capital Analysis and Review
KYC = Know your customer AML = Anti-money landering CRA = Community Reinvestment Act
Dimon acknowledges that many newcomers have found ways to ease consumers’ pain points with traditional providers but he implies that they haven’t had to labor under the same set of rules and restrictions.
Further, “while some of this may have been deliberate,” he says, “sometimes the rules were accidentally calibrated to move risk in an unintended way. … New risks get created. While it is not clear that the rise in nonbanks and shadow banking has reached the point of systemic risk, this trend is accelerating and needs to be assiduously monitored.”
In speaking of competition from big techs, notably Amazon, Apple, Facebook, Google and Walmart, Dimon notes that these companies increasingly are running into their own regulatory issues here and overseas. This includes issues such as privacy and use of consumer data.
Truth is, the banking lobby has been using the “level-playing-field” argument in various contexts for at least four decades, with only moderate success, and relief has often arrived too late to make a difference.
Dimon knows banking history and doesn’t seem to have much hope that Washington will level the playing field.
“While we will argue for a level playing field, both in terms of how products and services are treated by regulators and possibly how competition should be treated across platforms, we are not relying on much to change,” says Dimon. “So we will simply have to contend with the hand we are dealt and adjust our strategies as appropriate.”
- How Fintechs Fight, Rent and Buy Their Way Into Banking
- What the Surge in Fintech Launches Signals for Banking’s Future
- Varo Bank Launches Across the U.S. With Massive Marketing Blitz
Key Issues that Policymakers Must Address
Dimon devoted another large section of the letter to the Dodd-Frank Act, passed in 2010 in wake of the financial crisis. He praises much of the law, but also calls it dated in outlook.
Thanks to Dodd-Frank, he says, “Nothing like what happened to the banks in the Great Recession can happen again. But it’s bogged down in the past — it needs to focus on the future.”
Dimon says many emerging issues need to be addressed that aren’t getting the attention due them. This includes: the growth of shadow banking, the legal and regulatory status of cryptocurrencies, the proper and improper use of financial data, the tremendous risk that cybersecurity poses to the system, the proper and ethical use of AI, and the effective regulation of payment systems.
Will Chase Staffers Come Back to the Office?
The nation’s largest bank has assessed the future in the wake of Covid and decided that it will attempt to return to something like normal, barring any unforeseen circumstances. Only a handful of staffers will continue working from home, once the shift is made.
While Chase and many other organizations managed to function under coronavirus conditions, Dimon feels the experience evidenced some critical weaknesses. From his letter:
- Performing jobs remotely is more successful when people know one another and already have a large body of existing work to do. It does not work as well when people don’t know one another.
- Most professionals learn their job through an apprenticeship model, which is almost impossible to replicate in the Zoom world. Over time, this drawback could dramatically undermine the character and culture you want to promote in your company.
- A heavy reliance on Zoom meetings actually slows down decision making because there is little immediate follow-up.
- Remote work virtually eliminates spontaneous learning and creativity because you don’t run into people at the coffee machine, talk with clients in unplanned scenarios, or travel to meet with customers and employees for feedback on your products and services.
While there will be precautions and adjustments, Dimon says Chase still intends to build its new headquarters in New York City.