Hedge funds, low-income borrowers and municipalities face steeper costs from global rules enacted after the financial crisis as banks stand to benefit, said JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon.
Clients seeking derivatives, short-term deposits, revolving credit, trade finance and retail mortgages will be disproportionately affected by higher banking costs, Dimon, 58, said yesterday in his annual letter to shareholders.
“Certain clients -– for example, municipalities (which will see far higher costs for certain types of deposits and credit lines), clients with large amounts of trade, credit-only clients and specific types of financial companies –- will experience far higher” banking costs, Dimon wrote.
Lenders are grappling with new regulations designed to prevent blowups by forcing companies to hold more capital, limit risky bets and move derivatives to public exchanges. The outlines of the new global regime will take shape this year, forcing some firms to make “drastic changes” to businesses, said Dimon, who leads the biggest U.S. bank.
Hedge funds and payday lenders are among firms with affected products and lacking a broad array of banking relationships that could help defray higher costs. The cost of offering undrawn revolving credit lines may rise 60 basis points, and short-term trade finance and standby letters of credit could rise 75 basis points, Dimon wrote. A basis point is 0.01 percentage point.
As banks increase prices or exit products, some clients will be drawn to the so-called shadow banking system, Dimon wrote. He cited “increasingly sophisticated shadow banks,” including money market funds, asset managers and mortgage servicers, as competitors he’s keeping tabs on. Others include large Chinese banks and technology firms.
“Non-bank financial competitors will look at every product we price, and if they can do it cheaper with their set of capital providers, they will,” Dimon wrote. “Regulators should -– and will -– be looking at how all financial companies (including non-bank competitors) need to be regulated.”
Higher capital requirements for mortgage lenders and servicers, along with a “highly litigious environment” and more rules means home loans will be costlier.
“In many cases, deserving lower and middle-income consumers may pay far more than they might have in the past for a mortgage or, worse yet, they won’t be able to get one,” Dimon wrote.
Still, new regulation has “unquestionably” made the financial system safer and more transparent, he wrote. The changes also could protect existing banks’ primacy because competitors will have a harder time entering markets.
“It is possible that many of these changes will create a bigger ‘moat’ around the banking system,” Dimon wrote, using a term popularized by billionaire investor Warren Buffett, 83.
It refers to a business’s ability to protect market share from competitors. Dimon is a fan of Buffett’s annual investor letters and has read them for decades, according to Duff McDonald’s book “Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase.”
The CEO is seeking to spread JPMorgan’s influence. The bank will create the JPMorgan Chase Institute to help “educate the world” on topics in which the firm has expertise, including global trade and urban development, he wrote.
Dimon, who last year presided over more than $20 billion in legal settlements that contributed to the bank’s first quarterly loss during his tenure, struck a conciliatory tone. The bank had a “tin ear” when dealing with regulators before settling probes into mortgage lapses and trading losses.
“Our response generally was, ‘We know what we’re doing,’” Dimon wrote. “Well, we should have done more self-examination. We need to be better listeners.”
In a separate filing yesterday with the Securities and Exchange Commission, the bank cited Dimon’s role in resolving regulatory and legal disputes as one reason he deserved a 74 percent raise to $20 million for 2013. He also bolstered the firm’s “pipeline of talented and diverse business leaders.”
Mike Cavanagh, 48, a long-time Dimon deputy seen internally as his potential successor, quit last month as co-chief of the investment and corporate bank to take a job at private-equity firm Carlyle Group LP. Blythe Masters, 45, head of the commodities division, also said she plans to resign after helping with the $3.5 billion sale of units she oversaw.
To contact the editors responsible for this story: Peter Eichenbaum at firstname.lastname@example.org Dan Reichl