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Jamie Dimon Unleashes Criticism On Fed's Annual Stress Test

Derek Wolfe

Updated: July 18, 2022

dimon stress test
Editor’s Note:

EDITOR'S NOTE: Having concluded the Federal Reserve’s 2019 stress test, JPMorgan Chase barely scraped by in all of the “severely adverse” scenarios, having projected major losses in the net income category. Perhaps it’s not so surprising that JPM’s CEO Jamie Dimon recently unleashed a series of criticisms of the Fed’s annual exercise, particularly as it scrambles to scrape up enough capital to comply with the results. Dimon’s criticisms came at the heels of its big Q2 earnings miss which saw JPM tumbling down 5% to a 52-week low. Nobody wants to see a repeat of the 2008 financial crisis (which is why banks now have these annual stress tests). But in the world of sound money, it seems awkward to take the words of a precious metals market manipulator and read them against the very institution that is responsible for rigging market valuations, implementing wealth transference from the poor and middle class to the wealthy and eroding the wealth of American household through its once-presumed “transitory” solution. 

KEY POINTS
  • Asked by veteran banking analyst Betsy Graseck of Morgan Stanley on Thursday about the Federal Reserve’s recent stress test, Dimon unleashed a series of critiques about the annual exercise, which was implemented after the 2008 financial crisis nearly capsized the world’s economy.
  • JPMorgan is scrambling to generate more capital to help it comply with the results of the Fed test, including by halting its share repurchases.
  • Other steps the bank has been forced to take: JPMorgan is pulling back on “risk-weighted assets,” which broadly means anything on the bank’s balance sheet that requires capital to be held against it. As one example, JPMorgan is planning to dump mortgages held in its portfolio, Dimon said.

JPMorgan Chase CEO Jamie Dimon didn’t mince words when it came to the regulatory process that forced his bank to suspend its stock buybacks.

Asked by veteran banking analyst Betsy Graseck of Morgan Stanley on Thursday about the Federal Reserve’s recent stress test, Dimon unleashed a series of critiques about the annual exercise, which was implemented after the 2008 financial crisis nearly capsized the world’s economy.

“We don’t agree with the stress test,” Dimon said. “It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious, arbitrary.”

JPMorgan, the biggest U.S. bank by assets, is scrambling to generate more capital to help it comply with the results of the Fed test. Last month, steadily increasing capital requirements within the test hit the biggest global financial institutions, forcing the New York-based bank to freeze its dividend. While Citigroup made a similar announcement, rivals including Goldman Sachs and Wells Fargo boosted investor payouts.

Under the exam’s hypothetical scenario, JPMorgan was expected to lose around $44 billion as markets crashed and unemployment surged, Dimon said. He essentially called that figure bunk on Thursday, asserting that his bank would continue to earn money during a downturn.

After JPMorgan released second-quarter results, it disclosed a raft of other measures it is taking to husband capital, including by temporarily halting share repurchases. That move, in particular, wasn’t welcomed by investors, as the stock hasn’t been this cheap in years.

Shares of the bank fell as much as 5%, hitting a fresh 52-week low.

Big changes

CFO Jeremy Barnum added to the conversation, saying that while regulators give plenty of information about the contours of the annual exam, a key element of the so-called stress capital buffer doesn’t get released to banks, making it “really very hard at any given moment to understand what’s actually driving it.”

“We feel very good about building [capital] quickly enough to meet the higher requirements,” Barnum said. “But they’re pretty big changes that come into effect fairly quickly for banks, and I think that’s probably not healthy.”

Other steps the bank has been forced to take: JPMorgan is pulling back on “risk-weighted assets,” which broadly means anything on the bank’s balance sheet that requires capital to be held against it. As one example, JPMorgan is planning to dump mortgages held in its portfolio, Dimon said.

A consequence of these moves is that JPMorgan, a massive institution with a $3.8 trillion balance sheet, is forced to withdraw credit from the financial system just as storm clouds gather on the world’s biggest economy.

The actions happen to coincide with the Fed’s so-called quantitative tightening plans, which call for a reversal of the central bank’s bond-purchasing efforts, including for mortgages, which could further roil the market and drive up borrowing costs.

‘Making it worse’

The upshot is that the bank has to act at “precisely the wrong time reducing credit to the marketplace,” Dimon said.

The moves will ultimately impact ordinary Americans, particularly lower-income minorities who typically have the hardest time obtaining loans to begin with, he said.

“It’s not good for the United States economy and in particular, it’s bad for lower-income mortgages,” Dimon said. “You haven’t fixed the mortgage business and then we’re making it worse.”

During a media call Thursday, Dimon told reporters that while JPMorgan isn’t exiting the business, the capital rules could force other banks to recede from home loans entirely. Wells Fargo has said it would shrink the business after surging interest rates caused a steep drop in volume.

Instead, JPMorgan will originate mortgages, then immediately offload them, he said.

“It’s a terrible way to run a financial system,” Dimon said. “It just causes huge confusion about what you should be doing with your capital.”

Originally published on CNBC.

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