Exclusive interview with J.P. Morgan CEO: Continue to invest prudently in China and advance China strategy

After experiencing the turmoil in the banking industry in March this year, Wall Street’s current recessionary haze seems to have been swept away.

Daniel Pinto, president and chief operating officer of JPMorgan Chase & Co., launched his Asia tour last week. According to China Business News, during his stay in Shanghai, he met with a number of well-known Chinese companies and financial institutions and exchanged views with them.

What does it mean for Wall Street's biggest players that capital requirements for big banks will soon be tightened again? How do you view China's economic prospects and strategic layout? In response to these issues, Daniel Pinto accepted an exclusive interview with a reporter from China Business News in Shanghai.

Finding synergies with First Republic Bank

The collapse of Silicon Valley Bank (SVB) was the first serious crack in the Federal Reserve's aggressive interest rate hikes, and then the "big guy" First Republic Bank also collapsed and was taken over by JPMorgan Chase.

According to a statement from the Federal Deposit Insurance Corporation, 84 First Republic Bank offices in eight states in the United States opened normally as branches of JPMorgan Chase on May 1 this year. The assets of First Republic Bank acquired by JPMorgan Chase include approximately US$173 billion in loans and approximately US$30 billion in bonds, while acquiring approximately US$92 billion in First Republic Bank deposits.

Daniel Pinto said, "This is a good deal that stabilizes the sentiment of financial markets and depositors, which is beneficial to everyone; the bank's problems have nothing to do with asset quality. In essence, when interest rates are raised, they have Too many risk exposures, but the quality of the investment portfolio is very good and the business model is also very good." Data shows that as of the end of last year, the number of high-net-worth customers of First Republic Bank with more than $1 million was 138,000 households, accounting for 10% of the U.S. The proportion is 4.45%. In other words, First Republic Bank's customer base is mainly wealthy people, and it is very conservative and prudent in terms of credit quality.

He also said that he is currently working to enhance the synergy effect with First Republic Bank. “We are working with all First Republic clients and have not lost any depositors so far, and most of our talent has stayed. We are learning from First Republic’s customer service model to create more synergies. So far so good , the number of depositors is also increasing.”

Daniel Pinto believes that there is no need to worry too much about the health of global systemically important banks (GSIBs).

Specifically, he analyzed that there are three subjects for bond investment in the accounting statements: trading financial assets, available-for-sale financial assets (AFS), and held-to-maturity investments (HTM). Among them, the price fluctuation of AFS is not included in the income statement, but is included in the balance sheet; the price fluctuation of HTM is neither included in the income statement nor the balance sheet, and is recorded at amortized cost. So the "solution" is very simple, which is to put all these long-term bonds in HTM, or at least in AFS.

In fact, the implicit idea is that "floating losses are not considered losses", but this requires the bank's ability to hold the bonds until maturity. However, SVB can neither stabilize the cost on the liability side nor the quantity on the liability side. The original intention of accounting standards is that if assets and liabilities are well matched, you don't have to worry so much about market price fluctuations. But in the case of mismatch, it obviously cannot be ignored. If the liability may be withdrawn at any time, or if interest rates suddenly surge, it is practically impossible to hold it to maturity.

He also believes that each GSIBs have assets in excess of US$250 billion, have stricter capital requirements and regulations, and have a stable liability side.

Since 2010, as the Federal Reserve has assumed the regulatory responsibilities of large banks, the stress testing system has been further improved. The Federal Reserve has gradually established two stress testing frameworks, DFAST and CCAR. CCAR started in 2010 and was carried out for bank holding companies with more than 50 billion US dollars. It mainly includes four parts: stress scenario design, income loss estimation, capital planning and management measures, and result evaluation.

Tighter capital regulations pose a challenge to major banks

Nonetheless, large banks now have new worries, and capital regulations will be further tightened.

The "Dodd-Frank Act" after the financial crisis put tight constraints on banks, and capital requirements are quite stringent for systemically important banks. Daniel Pinto mentioned that although the supervision after 2008 was strict, it allowed more large banks to have more abundant capital and liquidity, which is positive from this perspective. But the problem is how to recalibrate. Compared with the past, each unit of risk taken by banks now requires higher capital. This affects the liquidity of the market and causes the market to be very volatile once risks occur. The lack of liquidity will also make buying and selling difficult. difficulty.

Not only that, Daniel Pinto also said that a new round of supervision has arrived, which may further significantly increase banks’ capital requirements.

As early as July 27 this year, the Federal Reserve, FDIC and the Office of the Comptroller of the Currency (OCC) solicited comments on proposed rules to strengthen capital requirements for large banks. The proposed rule would revise capital requirements for large banks to better reflect potential risks and improve the consistency with which banks measure risk. The latest reforms will increase capital requirements for banks with assets of at least $100 billion by about 16% from current levels. Among them, the capital adequacy ratio of the eight global systemically important banks in the United States will increase by approximately 19%, and the capital requirements of banks with assets in the range of US$100 billion to US$250 billion will increase by 5%.

Daniel Pinto said, "The United States is now implementing the last part of Basel III regulation, and the 'BASEL III Endgame' (Basel III Endgame) is in the consultation process until November this year. Although we do not yet know the specific content of the regulation, it is certain Yes, banks need to further increase capital. For large banks, if they bear the same risks as currently, the capital they may pay in the future will be about 25% higher than the current average."

Specifically, he believes that on the one hand, the capital for market trading business will be increased, making market liquidity more challenging, and customers' ability to buy and sell securities, foreign exchange, etc. will be restricted; on the other hand, operational risk capital will be increased ( operational risk capital), will affect the bank's broader business. The impact on the lending business (mortgages, corporate loans, car loans, etc.) may be mixed, but the impact on increasing capital for the market transaction business will obviously be greater.

He also admitted that during the consultation period in the fourth quarter of this year, he will try to communicate with regulators in the hope of lowering capital requirements. “In fact, the capital regulations since 2008 have been enough for banks to cope with various risks. An additional increase of more than 20% in capital requirements in the future will put banks under further pressure and reduce the competition of the U.S. banking industry compared with other banks around the world. force."

U.S. Treasury yields will be higher than expected

In addition to regulatory developments, the strength of the U.S. economy and changes in U.S. bond yields, which are the anchor of asset pricing, are also crucial to the banking industry. The earlier unexpected surge in U.S. bond yields was also one of the main reasons for the collapse of SVB.

Recently, U.S. bond yields have surged across the board, with the 10-year Treasury yield still close to 4.2%. Some people believe that there are three major reasons for the surge in U.S. bond yields - expected improvement in the U.S. economy, high inflation expectations, and continued expansion of the fiscal deficit.

Daniel Pinto believes that in the past 20 years, interest rates and bond yields have been very low, but the situation will be different in the future - after the epidemic, the debt of each country will account for a higher proportion of GDP, and the fiscal deficit will continue to grow (the U.S. fiscal deficit in 2023 has expanded to 5.8% of GDP and may remain at this high level in the next two years), "Therefore, the supply of government bonds will be larger in the future. Based on the supply relationship, both the real interest rate and the nominal interest rate may be higher than in the past. In the future Even if inflation returns to normal levels, the 10-year Treasury yield range may be between 3.5% and 4.5%, and it will be difficult for interest rates to return below 1%."

In his view, the current "soft landing" of the U.S. economy is expected to be achieved, and inflation may fall back to a level of 2% to 2.5% next year, which will give the Federal Reserve the confidence to reweigh monetary policy.

"In historical recession scenarios in the United States, the degree of GDP contraction from peak to trough is about 2.5 to 3 percentage points. I think that even if there is a recession in the United States in the future, it will not occur in 2024. It may take longer, and the economic decline may be greater. Small."

JPMorgan Chase’s China strategy has not changed

With the intensification of geopolitical frictions and the changes in China's economy in recent years, whether foreign investment in China will continue to advance has triggered heated discussions.

Since the beginning of this year, the number of Hong Kong stock IPOs has plummeted, which has led to setbacks in the traditional advantageous projects of international investment banks and frequent news of layoffs. In this regard, Daniel Pinto said, “China’s economic growth is slowing down, but it is still close to 5%. For a growing economy, financing needs will remain high, and the number of companies listed on both A-shares and Hong Kong stocks will continue to increase. "

In fact, global investment banking business has slowed down in the past year. According to JPMorgan Chase's estimates, global investment banking business (M&A, ECM, IPO) will reach US$95 billion in 2020, reach US$135 billion in 2021, and drop to US$78 billion to US$79 billion in 2022. It is expected to be even lower this year, about US$70 billion, mainly due to rising uncertainties, such as those surrounding inflation, recession, regulatory uncertainty, and the fact that the regulatory approval process for mergers and acquisitions in the United States is taking longer than in the past, especially due to antitrust considerations .

"But I don't think this weak trend will continue. Business volume will still pick up. There are still a large number of companies in the high-yield bond market that have refinancing needs and IPOs. In the future, the visibility of inflation and recession will also increase, and the outlook More clarity. The global investment banking business capacity may stabilize at US$80 billion to US$90 billion." Daniel Pinto said.

Earlier there was also news that foreign banks have begun to significantly reduce their exposure to China risks. In response, he said that JPMorgan Chase’s China strategy has not changed. “We are also grateful to China’s regulatory agencies for approving the application and giving us the required licenses and qualifications. JPMorgan Chase’s overall China risk exposure remains stable, and we We will continue to operate prudently and serve Chinese and global enterprises."

In July this year, when U.S. Treasury Secretary Yellen visited China, she also stated that the United States does not seek "decoupling and breaking links" and has no intention to hinder China's modernization process. Strengthen cooperation on challenges and seek mutual economic benefits and win-win results between the United States and China. "There are indeed differences between China and the United States, which may need to be improved through more dialogue. We will continue to be committed to the development of the Chinese market. As in the past, we will continue to invest prudently in China and promote China strategy." Daniel Pinto said.