Banking crisis increased odds of US recession, Jamie Dimon warns

Odds of a recession in the US have risen after a string of bank failures that raised concerns about the overall health of the banking sector in country, the chief executive of JPMorgan Chase has warned.

While the banking system of the world's biggest economy remains robust and stable, the spectre of a prolonged economic contraction cannot be discounted following unfavourable events in the critical sector, Jamie Dimon, who runs the biggest lender in the US, said in an interview with CNN. "Yes [there are increased chances of a recession], but I look at it as not definitive — it's just like another weight on the scale," Mr Dimon said in his first comments since the collapse of Silicon Valley Bank (SVB), which triggered a series of banking failures in the country and rocked the global banking sector.

"We are seeing people reduce lending a little bit, cut back a little bit, pull back a little bit. It won't necessarily force a recession but it is recessionary."

There are also "storm clouds" ahead for the world's biggest economy, with Mr Dimon citing quantitative tightening (QT), consistently high inflation and the continuing conflict between Russia and Ukraine as the main sources of disruption. "Those are pretty strong things," he said. "It's still early in that — the war [in Ukraine] going on for longer, we don't really know the outcome of QT. I think we'll be right about QE [quantitative easing] and QT for the next 50 years."

QT refers to the policies that the Federal Reserve introduces to reduce its balance sheet, while QE, which became a byword since the 2008 global financial crisis, is the opposite as it seeks to expand it.

Mr Dimon's comments follows a letter he sent this week to shareholders of JPMorgan Chase in which he said the current "disruption" in the US banking system reflects that "most of the risks are hiding in plain sight". "The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come," he wrote.

US regulators seized SVB and placed it on receivership after its collapse last month. SVB — the go-to bank for technology entrepreneurs and start-ups was the 16th-largest bank in the US and the biggest in Silicon Valley at its peak — became the biggest bank failure in US history after Washington Mutual's collapse in 2008, which triggered the global financial crisis.

It became the starting point for a series of bank collapses in the US, including Silvergate Capital and Signature Bank, both of which are heavily involved in the technology sector, as well as mid-sized bank First Republic.

There have been 563 bank failures in the US from 2001 to 2023, with 414 occurring between 2008 to 2011 alone and peaking at 157 in 2010, latest data from the US Federal Deposit Insurance Corporation shows.

Adding fuel to the fire was the financial troubles of Credit Suisse, considered one of the global systemically important banks, after its top shareholder said it would not be adding further investment. Fellow Swiss bank UBS agreed to buy its smaller rival for $3.2 billion to try to avoid more turmoil in global financial markets.

Rising geopolitical tensions and geo-economic fragmentation are also posing as serious threats to global financial stability, redirecting cross-border investments and hitting emerging markets the most, the International Monetary Fund warned in this week.

The world could lose nearly 2 per cent of its output in the long term as investors re-divert foreign direct investment flows in line with geopolitical preferences.

The US, economy is forecast to expand 1.4 per cent in 2023, instead of a previous 1.6 per cent estimate, down from 2 per cent last year and 5.7 per cent in 2021, the Washington-based lender said in the World Economic Outlook in January.

The fates of SVB and Credit Suisse, and the related stress in the banking system, "underscore that simply satisfying regulatory requirements is not sufficient", Mr Dimon said in his letter. "Risks are abundant, and managing those risks requires constant and vigilant scrutiny as the world evolves."

He said the failures of US banks were "not good for banks of any size", and any hit to the sector "damages Americans’ trust in their banks".

This is "a fact that was known even before this crisis", he said. "While it is true that this bank crisis 'benefited' larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd," he added.