Jamie Dimon, CEO, JPMorgan Chase, during Jim Cramer interview, February 23, 2023.
Deposit runs caused the collapse of three US banks this year, but another worry is building on the horizon.
Commercial real estate is the sector that can pose the most problems for lenders. JPMorgan Chase CEO Jamie Dimon told analysts on Monday.
“There’s always an off-side,” Dimon said in a Q&A session during his bank’s investor conference. “The off-side in this case would probably be real estate. It would be certain locations, certain office properties, certain construction loans. It could be very isolated; it wouldn’t be every bank.”
US banks have experienced historically low loan defaults over the past few years due to low interest rates and a flood of stimulus funds during the Covid-19 pandemic. But the Federal Reserve has raised rates to fight inflation, which has changed the landscape. Commercial buildings could be hit in some markets, including tech-centric San Francisco, as remote workers are reluctant to return to offices.
“There will be a credit cycle. My view is that it will be pretty 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 it would still be less than the 10% experienced during the 2008 crisis, he said.
Separately, Dimon said that banks — especially the smaller ones most affected by the industry’s recent turmoil — needed to plan for interest rates that are higher than most expected.
“I think everyone should be prepared for rates to go up from here,” to 6% or 7%, Dimon said.
The Fed concluded last month that mismanagement of interest rate risks contributed to the failure of Silicon Valley Bank earlier this year.
He said the industry is already building up capital for potential losses and regulation by reining in its lending activity.
“You are already seeing credit tightening because the easiest way for the bank to retain capital is not to make the next loan,” he said.