Jamie Dimon, CEO, JP Morgan Chase during a Jim Cramer interview, February 23, 2023.
The drop in deposits has led to the collapse of three US banks this year, but another concern is looming on the horizon.
Commercial real estate is the area most likely to cause problems for lenders. JPMorgan Chase CEO Jamie Dimon told analysts on Monday.
“There are always offsides,” Dimon said in a question-and-answer session during his bank’s investor conference. “The downside in this case will likely be real estate. It will be certain locations, certain office properties, certain building loans. It could be very isolated; it will not be every bank.”
US banks have experienced historically low loan defaults in recent years due to low interest rates and the flood of stimulus money unleashed during the Covid-19 pandemic. But the Federal Reserve has hiked interest rates to fight inflation, which has changed the situation. Commercial buildings in some markets, including tech-centric San Francisco, could suffer as remote workers are reluctant to return to their offices.
“There will be a credit cycle. In my opinion, that’s going to be quite normal,” with the exception of real estate, Dimon said.
For example, if unemployment rises sharply, credit card losses could jump to 6% or 7%, Dimon said. But that will still be less than the 10% seen during the 2008 crisis, he added.
Separately, Dimon said banks — especially the smaller ones, which have been hardest hit by the recent turmoil in the industry — should expect interest rates to rise far more than most expect.
“I think everyone should be prepared that rates will go up from now on,” up to 6% or 7%, said Dimon.
Last month, the Fed concluded that mismanagement of interest rate risk contributed to the failure of the Silicon Valley bank earlier in the year.
The industry is already building up capital for potential losses and regulation by curtailing its lending, he said.
“There’s already a credit tightening because the easiest way for a bank to keep capital is to not make the next loan,” he said.