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Jamie Dimon May Want To Send Powell A Thank-You Note

Shareholders and chiefs of America’s big banks should get some thank you cards over to Jerome Powell.

Jamie Dimon May Want to Send Powell a Thank-You Note
Jamie Dimon May Want to Send Powell a Thank-You Note

Shareholders and chiefs of America’s big banks should get some thank you cards over to Jerome Powell.  

The Federal Reserve’s interest rate increases have delivered a huge boost to revenue for Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. so far this year without – as yet – causing any problems for borrowers. Okay, the residential mortgage business has dried up and much of investment banking has been benched, but growth in net interest income is more than compensating.

NII is the difference between what banks earn on assets such as loans and how much they pay for deposits and other funding. In third-quarter results on Friday, JPMorgan and Wells Fargo reported NII up by more than one-third compared with the same period last year, while Citigroup’s was up by one-fifth. All three banks comfortably beat analysts’ expectations for interest income and more strong growth is forecast.

Jamie Dimon May Want To Send Powell A Thank-You Note

Importantly, it has kept the banks in positive territory: All other revenue combined shrank year over year for each of these banks. And even though everyone is convinced a recession is looming in some form, there isn’t yet any sign of it in the numbers.The money banks are putting aside for potential bad loans is rising, but not to troubling levels. The provisions each made in the third quarter aren’t much different to the amounts they put aside in any quarter of 2019, before Covid-19 and rampant inflation. There has been a big swing from the bad loan provisions that the banks were releasing this time last year, but the gains from higher interest income compensate.

Jamie Dimon May Want To Send Powell A Thank-You Note

Given the outlook, shouldn’t they be socking away more? The world is worried about recessions for a reason: Higher interest rates will start to hurt demand, that is after all the point, and so spending should fall and unemployment could rise. Jamie Dimon, chief executive officer of JPMorgan, said this week that consumers may start to run low on savings and feel the squeeze of higher living costs much more in about nine months’ time. That’s when credit problems could start to appear – or at least appear more likely.

US banks have to put money aside for all the credit losses they expect over the lifetime of a loan under recently introduced accounting rules – rules that Dimon hates, by the way. He told analysts that if unemployment got above 5%, that could mean the bank has to make another $6 billion of provisions over a couple of quarters. That’s not only because higher unemployment means more people will struggle with their credit card bills, but also because it increases the probability that the economy will deteriorate further. It makes unemployment of say 8% more likely that it looks today.

That $6 billion figure compares with $1.5 billion in provisions for the third quarter this year and $10.5 billion in the second quarter of 2020, which was the peak for Covid-related provisions, most of which were never needed. Dimon doesn’t like the rule because it makes earnings more volatile and doesn’t reflect actual losses. It’s meant to ensure that banks can’t spend too long pretending their loans are better than they are, but the extreme swings seen during Covid do make the rules seem less sensible than they ought to be.

But in the outlook for losses, we’re just not there yet. Consumers seem comfortable from the banks’ point of view. They are happily spending more money both on the necessary and the nice to have. There has been no discernable shift from discretionary to non-discretionary spending according to JPMorgan.

It seems inevitable that life will get worse for consumers, especially those on lower incomes, and bad loan provisions will rise. And in financial markets, the tensions are palpable with many investors fretting about contagion and continuing asset price falls. But JPMorgan and Citi are still enjoying strong results from their bond and currency trading businesses too because of the volatility from higher rates — even if the rest of investment banking is struggling.

The Fed’s determination to kill inflation with rate rises, which is causing all the concern, is still helping to cover a multitude of other looming problems among the banks. And still giving shareholders a sturdy defense against the storms ahead, thanks to Jay.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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