This is an audio transcript of the Behind the Money podcast episode: ‘How JPMorgan thrived amid a banking crisis’
Michela Tindera
Josh, if you were to describe US banking throughout 2023, in one word, what would it be?
Joshua Franklin
I would say panic.
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Michela Tindera
Panic. Let’s think back to then. Right around this time last March. Silicon Valley Bank is on the verge of collapse. And when it does, that sparks a crisis among regional banks. And others fall too. It shakes America’s banking sector to its core. And the FT’s US banking editor, Josh Franklin, says that since then, many small and medium sized banks have struggled.
Joshua Franklin It’s really been a case of the haves and the have-nots in US banks over the last 12 months or so. The haves have been a pretty small number. You’ve got the very, very biggest banks, JPMorgan, Bank of America’s Wells Fargo that have been making a lot of money. And then you’ve got the have-nots, the kind of mid-sized regional banks on down that have really seen their profit margins struggle in a period of high interest rates.
Michela Tindera
Within that group of haves performing well, there’s one bank that’s truly risen to the top.
Joshua Franklin
That was JPMorgan Chase. JPMorgan was already the biggest bank in the US by assets, by deposits, by headcount. But they really managed to open up a sizeable lead over peers like Bank of America, Wells Fargo and Citi.
Michela Tindera
That sizeable lead is pretty much undeniable.
Joshua Franklin
They made almost $50bn in profits in 2023, which is more than they’ve ever made in their history. Across the entire banking industry, just under $1 out of every five in profits was earned by JPMorgan. JPMorgan themselves even admitted that they were overearning in 2023.
Michela Tindera
That’s right. Overearning. JPMorgan’s record $50bn in profits were more than the rest of the largest American banks combined. But in a year that was overall pretty rough for the industry, how did JPMorgan do it?
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I’m Michela Tindera from the Financial Times. Banking in America hasn’t been easy since Silicon Valley Bank collapsed a year ago, but JPMorgan is defying that trend. Today on Behind the Money, we’re diving into the three reasons why JPMorgan is doing so well and what, if anything, could threaten that in the future.
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The first of the three reasons why JPMorgan’s been doing so well begins with a decision they made last year after the collapse of Silicon Valley Bank and after the collapse of Signature Bank. So let’s head back to that time. It’s April and another regional bank, First Republic, is in some hot water.
News clip
The end appears nigh for First Republic Bank.
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First Republic’s problems are causing anxiety for everyone, from customers to the Feds.
News clip
We are awaiting the fate of First Republic Bank.
Michela Tindera
By the end of the month. There’s a run on the bank. The government organises an emergency auction of First Republic. Four different banks bid and rebid to take it over. And in the end, the winner is JPMorgan.
Joshua Franklin
First Republic was the second-largest bank failure in US history, and the biggest that we’d seen in the US since the 2008 financial crisis. When the bank ultimately did fail at the end of April until May, JPMorgan was pretty well placed to scoop up the remains of the bank.
Michela Tindera
Under normal conditions, Josh says that regulators wouldn’t have let JPMorgan buy a bank like First Republic, but these circ*mstances made it different.
Joshua Franklin
It was a unique opportunity for JPMorgan because US regulators don’t like big banks getting bigger, especially through acquisitions. And JPMorgan actually isn’t able to buy another bank because it has more than 10 per cent of the industry’s deposits. But because it was special circ*mstances and a government-managed process of a failed bank, JPMorgan was allowed to participate in this auction and in the end blew out of the water these other smaller banks that were competing to buy First Republic.
Michela Tindera
Now here’s the thing. This rescue wasn’t a new strategy. It’s actually a page out of a playbook that JPMorgan and its CEO, Jamie Dimon, have used before. So let’s rewind even further in time to 2008.
Joshua Franklin
People might remember way back in 2008, they won an auction in another deal orchestrated by the government to buy Bear Stearns, the investment bank, when it was on the brink of collapse.
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It’s JPMorgan Chase to the rescue. JPMorgan Chase has a deal to buy Bear Stearns for $2 a share.
Joshua Franklin
And then flash forward to Washington Mutual, which is still the biggest bank failure in US history.
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Washington Mutual has gone under the FDIC, took over Washington Mutual yesterday, then sold its assets to JPMorgan Chase for nearly $2bn.
Joshua Franklin
JPMorgan also was able to scoop up that business. And these kind of string of acquisitions have really helped to build the modern day JPMorgan into what it is.
Michela Tindera
Déjà vu anyone? JPMorgan swoops in to buy two separate failing banks in 2008, and then does the same thing in 2023. It looks like JPMorgan has a reputation for being the bank that never lets a crisis go to waste. So, Josh, what would you say really position JPMorgan to be able to make these acquisitions, both in 2008 and again in 2023? How are they able to pull this off each time?
Joshua Franklin
So one thing Jamie Dimon is very, very proud of and talks about constantly is the bank’s fortress balance sheet. And this is basically making sure that JPMorgan is in a financial position so that it can weather any financial crises, prepare for any kind of worst-case scenario. And not all rivals can say that they are in a similarly strong position.
Michela Tindera
And that fortress balance sheet, as Jamie Dimon puts it, leads to reason number two of why JPMorgan brought home a record amount of profits last year.
Joshua Franklin
JPMorgan has this perception of safety, in part because of the way it’s run and because of their fortress balance sheet. But I think probably what is even more important, if you’re a, you know, an average person in the street and wondering where to keep your money, you think the government would never let JPMorgan go bust.
Michela Tindera
In other words, what bank could seem safer than the biggest one in America?
Joshua Franklin
With everything that happened with Silicon Valley Bank, it made a lot of people question what these small regional banks in my community, how safe are they relative to the bigger banks that I feel like, you know, they’re so heavily regulated, the government would never let them fail. I should maybe keep my money with them.
Michela Tindera
So what does that mean for small-and mid-sized banks?
Joshua Franklin
This is the challenging thing. These other banks that aren’t classified as systemically relevant to the US economy, they don’t benefit from this same sense from customers that, you know they are unfailable. And so that means that they have to work harder in some cases to convince customers to keep their money with them. The whole vision of the US regional banking model is that these local banks serve a purpose, because they’re in their communities in a way that just a kind of large scale bank just couldn’t possibly replicate. But the challenges, at the end of the day, people want their money to be safe, and these smaller banks just don’t have that.
Michela Tindera
So to recap, we have two key ingredients to JPMorgan’s recent success. Number one, they pulled out a page from their 2008 playbook and bought a failing bank. Doing that allowed JPMorgan to earn a lot of new business by taking on First Republic’s former customers. And number two, they maintained their position as a safe haven. Their massive size retained and attracted customers who were scared other banks could go under in last year’s chaos. Now, the final thing that’s really boosted JPMorgan, is actually how other big banks have performed.
Joshua Franklin
All of their other big rivals, which benefited from higher interest rates to varying degrees — Bank of America, Wells Fargo and Citi — they all had their own stumbles and struggles over the course of the year. You’ve got Bank of America that made certain bets about interest rates in the market that haven’t panned out. You’ve got Wells Fargo and Citigroup, which are both under consent orders and restrictions by the US government because of previous mis-steps in their businesses. So it kind of leaves JPMorgan as the one unblemished mega bank in the US that’s really been able to capitalise.
Michela Tindera
While each of its rivals have hit different roadblocks, Josh says that Bank of America is the really interesting one to focus on.
Joshua Franklin
Bank of America had invested a lot of their excess deposits that they had amassed back when interest rates were low, and they decided to reinvest some of those deposits by buying Treasuries and other, quote unquote, safe assets. But then the issue for Bank of America, when rates started to rise, was that the value of these securities fell and they couldn’t really sell them, because if they sold them, they’d have to recognise a loss. So it just meant that instead of being able to reinvest these deposits, they had to just leave these securities on their portfolio, on their balance sheet. And that means that Bank of America was sitting on a paper loss of about $100bn.
Michela Tindera
And so this was the kind of investment that Jamie Dimon at JPMorgan avoided.
Joshua Franklin
Yeah, exactly. I mean, JPMorgan didn’t have that problem. About two years ago, Jamie Dimon said he wouldn’t go anywhere near long-dated Treasuries because he knew what would happen when interest rates eventually went up. And Bank of America made a different calculation and thought, this is something that’s worth us doing right now and investing in Treasuries. But fast forward to two and a half years later and JPMorgan seems to have made the right call.
Michela Tindera
So a choice JPMorgan made a couple of years ago panned out. But now the question is, are they going to be able to keep up this stellar performance. After the break, we’ll look at the challenges ahead for the biggest bank in America.
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Michela Tindera
JPMorgan wants to hold on to this title of being the biggest bank in the US, even as many other smaller banks are closing branches and downsizing. It’s making its intentions known by doing things like opening new locations around the country, investing more than its competitors in technology and well, by doing this. I’m standing here on the sidewalk near the corner of 48th and Park in Midtown Manhattan, and I’m craning my neck up to look at the top of this massive tower that’s under construction right now. And, you can just see construction workers with their highlighter yellow vests on and trucks bringing different sorts of materials. Wood. And I saw a cement mixing truck and different cranes. The other day, I went to get a look at the site where JPMorgan is building a brand new headquarters in New York.
Joshua Franklin
What it’s really emblematic of is the success and the strength of JPMorgan, the fact that they are spending all this money on this new headquarters that they’re talking about being, you know, a new symbol in New York City and Manhattan skyline. It really just serves to underscore the position of strength that JPMorgan’s working in right now.
Michela Tindera
It all sounds like smooth sailing for JPMorgan, right? Record profits. A swanky new headquarters in the heart of Manhattan. So, Josh, what does all of this mean for the year ahead for JPMorgan and its big ambitions to remain the largest US bank?
Joshua Franklin
In banking, scale matters, you know, especially in an era where this is such an incredibly heavily regulated industry now, getting more so every year. And so in an age when scale matters more and more, it makes sense that the biggest bank with the most scale would benefit the most. And that was really the story that played out in 2023. And I think what’s, you know, scary for the industry is not only is JPMorgan the most profitable bank by some distance now, they’re also spending a lot of money on their business to try to become even bigger.
Michela Tindera
Why is that scary for them?
Joshua Franklin
Well, it’s just because it’s, you know, banking in the US relative to other countries is still a relatively fragmented industry. Like you have 4,300 banks. JPMorgan, in terms of its assets as a relative percentage of the US economy is 10, 15 per cent or so. It just shows you that there’s still a lot of consolidation that can still happen in the US banking industry.
Michela Tindera
Yeah. So do you think that you are going to see more consolidation in 2024?
Joshua Franklin
I mean, there already has been this gradual consolidation and winnowing down of regional banks in the US. Before the 2008 financial crisis, there were more than 7000 US banks, and now we’re down to more than 4000. The question that’s always discussed is what’s the quote unquote, right number of banks in the US where you can still have this regional banking model? Could you still have the same kind of local flavour to US banking with 3000 banks or 2000 banks? What regulators and lawmakers are very focused on is still preserving competition in US banking, because from the point of view around customer deposits, it’s a good thing from the customer if people are competing for their money because it means they get a better price on their deposits. So I think people and lawmakers are aware of that, but they also are wary of the biggest banks getting continually bigger as a share of the overall market, which is something that JPMorgan managed to do last year. One of the really impressive accomplishments from them.
Michela Tindera
Keeping all of this in mind. Are there any looming threats to JPMorgan’s success long term?
Joshua Franklin
They’re always challenges on the horizon, but I say the big one that’s on people’s minds when they think about JPMorgan’s future is who will eventually replace Jamie Dimon when he one day retires. He’s in his late 60s now. He’s been running JPMorgan since the end of 2005. He hasn’t shown any plans or willingness to step aside, but it is just the perennial question about who could come after Jamie Dimon, having done such a big job at JPMorgan for so long? And I’d say when it comes to the big US banks, the biggest key man risk is at JPMorgan.
Michela Tindera
In your opinion, how do you think JPMorgan is going to fare this year? Is it, are there expectations to perform as well as last year?
Joshua Franklin
I don’t think anyone. I think people are sceptical that they can have another record year of profits after this year. JPMorgan itself said it was over earning, and they eventually expect to have to start paying more for deposits as customers start demanding more, and that would impact their profits. There’s also the wild card about what’s going to happen to interest rates this year. So if rates come back down, that’s good for parts of the industry, but also means that the amount that you can charge for loans probably comes down too. So I think 2023 was an extraordinarily good year for JPMorgan. 2024 probably won’t be as spectacular.
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Michela Tindera
Thanks for listening. Don’t forget, we’re still collecting submissions of questions you have about markets, finance or economics. If you send in a question, we might answer it on a joint show that we’ll be putting together with the FT’s markets podcast, Unhedged. There’s details on how to send in a question in our show notes. Behind the Money is hosted by me Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. See you next week.
