Dimon/US banks: guardians of the galaxy beat masters of the universe

Banks are private, profit-seeking enterprises. But according to Jamie Dimon, they are also a public good. He has plenty to say on the subject in his sprawling annual letter to shareholders.

The timing is right for the longstanding boss of JPMorgan, America’s largest bank, to examine the role of banks. Financial distress has swept through the sector, from Silicon Valley Bank in California to Credit Suisse in Switzerland.

Dimon has always insisted banks should stand by clients, even if that is not the most profitable choice. In his latest screed he insists that as shadow banks proliferate, traditional lenders can still be relied on for services unavailable elsewhere.

If that is true, regulators and policymakers have a narrow needle to thread in discouraging excessive risk-taking without crushing the viability of the sector.

Dimon points out that a bank with a cost of capital of 10 per cent can still originate a loan and earn a return of 12 per cent on it — assuming ten times leverage on the balance sheet). That seems a decent, commodity-like business. But Dimon points out that rising interest rates could easily crush such a trade.

Instead, Dimon sees the central activity of banks as creating “franchise value”. This involves building relationships with clients from which fees on asset-light and capital-light services are earned. He believes banks with physical branches and numerous employees are best placed.

But he says regulatory changes have made loyalty harder. In crucial areas like trading Treasury securities, capital and accounting rules are a particular burden.

Dimon therefore calls for banks to be “investible” — able to earn enough for shareholders to put up capital. Two existential dilemmas remain. Bank deposits are cheap but potentially unreliable liabilities. And one bank’s individual problems can quickly spill over.

Dimon concludes that banks are “guardians” of the financial system even as encroaching shadow banks and fintechs reduce their overall significance.

Cynics will scoff at Dimon’s apparent entitlement — and the hardly unfamiliar spectacle of a bank boss griping about regulation. However, Dimon’s analysis is fundamentally correct. Politicians and regulators must bear the viability of traditional banking in mind in the rejig the recent crisis will inevitably inspire.