Jamie Dimon is not running a charitable foundation. JPMorgan Chase, the bank he has led for the past 14 years, made a $36bn net profit last year.
Yet in last week’s annual letter to shareholders, Mr Dimon pledged the bank would lend an extra $150bn to clients. “Knowing there will be a major recession” as a result of coronavirus, he said, “we are exposing ourselves to billions of dollars of additional credit losses as we help both consumers and business customers through these difficult times.”
Earlier Frédéric Oudéa, chief executive of France’s Société Générale, described banks as the “doctors of the economy”.
Clearly, PR-savvy bank CEOs are keen to be seen as part of the solution to the steep downturn caused by Covid-19 lockdowns that have brought economies to a standstill. Optimists among them see it as their chance for salvation after a decade of opprobrium, earned from causing and compounding the 2008 financial crisis.
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Policymakers have been encouraging the do-gooder messaging. Regulators have relaxed capital rules imposed in the wake of the last crisis. And banks have been told to use the liberated funds to boost financing for individuals and businesses in need. According to a Financial Times calculation, nearly $500bn of capital has been freed up, allowing for $5tn of extra lending.
In many markets, including the US, UK and much of continental Europe, banks have been explicitly turned into instruments of state aid, distributing free or cheap lending to businesses that need it, underpinned by government guarantees.
At the same time, though, the expectation seems to be that banks should expand their own commercial lending just as the world is heading into an unprecedented economic crisis. It is easy to see why pressure is being put on unloved banks to do “the decent thing” and bail out troubled “real-economy” companies.
It should also be easy to see that it is barmy to increase bank lending in the teeth of a crisis of deepening but unknown scale.
Banks will already come under stress through a recessionary spike in loan losses. There will be little if any of the freed-up capital left to increase lending.
Granted, there will be categories of business that will thrive even as the crisis continues — from supermarkets to tech platforms that help people and companies communicate while housebound. They may well be reliable borrowers. Lenders should also, where prudent, consider easing credit terms and lowering return targets to help clients through this extraordinary period.
But that is quite different from the notion that banks should use their freed-up equity capital as a basis for higher leverage, borrowing $5tn of funds to spray at the economy and keep the flames of coronavirus at bay.
If any bank was really tempted to do this, rather than merely hint at it in PR-friendly messaging, regulators should take fright. As one central banker puts it: “Nationalising the losses from the corporate sector is one thing. If you go down the route of forcing the banks to take the losses and then have to nationalise the banking system, you have a far bigger problem.”
There is a strong argument, therefore, for more direct government assistance for business. That would help the banks stay healthy and ready to finance the economy once some semblance of normality returns. The “moral hazard” of such interventions should not be a concern. This is a global health emergency, not a reward for bad behaviour.
There is also a strong argument for non-financial companies to heed one of the biggest lessons that banks learnt — under duress from regulators — in the 2008 crisis: they had too little equity and too much debt. Today many non-financial companies are in the same position: corporate debt security volumes in the US have doubled to $6.6tn over the past 13 years, according to the St Louis Fed.
Whether or not companies secure state or bank bridge loans to get through the next few months of stress, the more sustainable, longer-term fix is to repair their balance sheets with additional equity. And if equity markets regain some of their original role as facilitators of capital raising — and decline accordingly as a betting shop for high-frequency traders — then perhaps the kind of lurching stock market plunges of recent weeks might be mitigated too.
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