Deposit runs have caused the failure of three US banks this year, but another worry is looming.
“There’s always an off-side,” Dimon said in a question-and-answer session during his bank’s investor conference. “The off-sides in this case will probably be real estate. It’ll be certain locations, certain office properties, and certain construction loans. It could be very isolated; it won’t be every bank,” he added.
Over the last few years, U.S. banks have experienced historically low loan defaults due to low interest rates and the flood of impetus money unleashed during the COVID-19 pandemic.
However, the Federal Reserve has implied hiking rates to fight inflation, which has completely changed the scenario. Although commercial buildings in some cities, such as tech-centric San Francisco, could be impacted as remote workers are reluctant to come back to offices.
“There will be a credit cycle. My view is it will be very normal” with the exception of real estate, Dimon said.
“For instance, if unemployment surges sharply, credit card losses might boost to 6% or 7%,’ Dimon said. Besides, it will still be lower than the 10% experienced during the 2008 crisis, he added.
Distinctively, Dimon said, especially the smaller banks are the ones most affected by the industry’s recent turmoil and need to plan for interest rates to increase far higher than the anticipated rate.
“I think everyone should be prepared for rates going higher from here,” up to 6% or 7%, Dimon stated.
Later, in the previous month, the Fed concluded that the mismanagement of interest-rate risks contributed to the initial failure of Silicon Valley Bank this year.
Dimon also stated that “the industry is already building capital for potential losses and regulation by reining in its lending activity.”
“You’re already seeing credit tighten up because the easiest way for a bank to retain capital is not to make the next loan,” he contemplated.
- Published By Team Genuine Reporter