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“Government intervention in banks could have its merits,” J.P. Morgan CEO Jamie Dimon says

by Isabella Bufacchi

Jamie Dimon, chairman of the board and CEO of US investment bank JP Morgan, is convinced that there are no problems without solutions and answers each question directly and sincerely. In his ten years at the helm of JP Morgan (235 ,000 employees, nearly $100 billion) he has seen his share of crises.

The government is “doing the right thing in trying to implement all the protection tools available” for banks because “there is no strong economy without a solid banking system.” State aid? European regulations do not allow government intervention in bank capital without burden sharing but “an agreement that mitigates those rules in the current special circumstances could have its merits.” Banking regulation? “It should be reduced, banks must be able to do their job, lending to businesses.” Brexit? “I do not think it will lead to a global recession,” but European politicians have to act quickly and stop the uncertainty, preferably with a more united Europe, “otherwise the market correction we’ve seen so far will be much worse.”

Dimon was in Rome yesterday to celebrate the 100 year anniversary of the bank's activities in Italy: country that was dear to the heart of the founder, John Pierpont, and also Dimon’s. “I love Italy” he cries when he is told that Milan wants to become like the City. But times are tough for Brexit and beyond. Dimon encloses the way out in one word: growth. “The most important thing now is growth, politicians have to do everything for growth.”

BUFACCHI: European and Italian bank shares continue to be under attack. Banks in Europe were hit hard after the UK chose to leave the European Union but banking stocks fell sharply before the Brexit vote, at the beginning of the year... is the banking sector out of the woods, or not? Italy asked and obtained from the European Commission the green light for a contingency plan, that is €150 billion in state guarantees as a precautionary liquidity support program which might be used on senior bonds. Rome and Brussels are also negotiating to reach an agreement in favor of state intervention in banks’ capital without burden sharing. Do you think the Italian government should help banks solve the NPLs problem and the capital shortage problem, given the extraordinary times we live in?

DIMON: Given the highly uncertain times that we’re living, I think that the government is doing the right thing in trying to implement all the protection tools available, reducing risks that may unfold. Current European rules don’t allow for government intervention in banks’ capital without burden sharing. I believe an agreement that mitigates those rules in the current special circumstances could have its merits. It is important that a clear communication around the agreement is made when it has been reached, avoiding further speculations and reducing uncertainty in the market. In our view markets will react positively to deals that provide definitive solutions for those banks that are required to dispose of nonperforming assets.

BUFACCHI: European banks and Italian banks have to satisfy mounting capital requirements, they are sounder compared to the pre-subprime crisis era, but they have to cope with overregulation, deleveraging, high fixed costs and now Brexit... The US banking system seems to be in far better shape, better off compared to the Great Financial Crisis: what went wrong in Europe?

DIMON: The US banking sector has totally recovered, it is strong, properly functioning. I agree with you the European banking sector is weaker partly because the European economy is weaker. And you have to be prepared for that, the economy goes up and down and so the banking sector does, the banking sector is always going to reflect the economy.

But you also continue to add new regulation, new capital accounts rules … but it is important to help the banking system. There is no successful economy without a successful banking system. It is in everyone’s interest to have a banking sector that can do its job, to lend to businesses. Mario Draghi (the president of the ECB-Editor’s note) is doing a great job, and he fully understands the banking system. But I think that at one point regulators will have to reduce regulation to let banks do their job, finance the economy. I speak to bankers, and some tell me they have to pull back because of all these continuing changes. Too many rules. Now the most important thing is growth not the introduction of hundreds of new rules.

BUFACCHI: You said that Draghi has done a great job, he was there to support banks. However negative rates is no good for the banking sector: margins are shrinking… and rates might get even lower after Brexit. What do you think?

DIMON: I am not a fan of negative rates and I am not sure anyone really understands how they work in the real world. I said more broadly Draghi is doing a great job but he cannot make up for public policy. It is very important for policy makers to introduce policies to engender growth, that will help every job, people, wages, inequality, new growth. Negative rates squeeze profits in the banking system, they do impinge on some banks’ ability to lend. At the same time regulators want to have profitable banks too, unprofitable banks are not safe and sound. We navigate it.

BUFACCHI: Prime Minister Matteo Renzi finds it hard to have a proper dialogue with Europe on growth, Italy makes proposals but the answers very often are “we cannot do this, we cannot do that.” Do you think Europe should focus more on ways to grow more and become a better place to attract investments? Especially now, after the Brexit vote...

DIMON: I said even before the vote, a Brexit can bring the EU to make appropriate positive changes and pull together or it can also make it split apart. I am more for perfecting the Union, and the common market, an open market, pull it together, to make it a better place. To split it up would have huge problems, huge difficulties. I am hoping that policy makers see legitimate complaints to labor rigidities, bureaucracy, regulation slowing things down, these are legitimate complaints, such as those of the citizens of Britain were worried about: Europe should listen to them. I do hope they are not going to sit at the table to negotiate and get angry, but they should get smart. Europeans should say: look, there are rational complaints, we are going to fix them for all of Europeans, not for Britain alone, but for everyone else. Maybe you can even reverse Brexit. There are always solutions to the problems, as long as you have the right people in the room.

BUFACCHI: Maybe we have too many people in the European rooms…

DIMON: That’s a good point.

BUFACCHI: Soon after the Brexit vote was known, J.P. Morgan did 1,000 trades per second. The markets reacted violently, sterling registered the biggest fall in its history and so did the Italian stock exchange. Do you think that the market overreacted? And how did J.P. Morgan respond to such extraordinary trading days?

DIMON: Sometimes the market has a rational reaction. There is going to be more uncertainty than many people thought going forward so the market reacted to that: so this is rational thinking, assets are going to be worth less, there is going to be less credit risk.
The world rationally adjusted to this new reality. Once you fully adjust to lower levels, you start to ask “what is this going to mean, really” and so now the markets are still going to be volatile. Markets are going to react to different news in different ways, who is going to negotiate with whom?

As for J.P. Morgan, we always want to be there for our clients. We are always open for our clients. Those 1,000 trades we did per second show just that. The electronic clearing platforms are very fast, very efficient for the clients. J.P.Morgan Chase spends $9 billion per year on technology, for both security and investing. We invested into electronic platforms for forex, for equities. Our strategy does not change: we want to be there for our clients, to make markets, to provide them with liquidity, make the loans, regardless of the environment.

BUFACCHI: What about your clients after Brexit: how are they behaving now, what are they asking for. Are they panicking? Brexit is something we have never seen before… the euro crisis, the sovereign debt crisis were exceptional but Brexit is unique in its own ways too…

DIMON: Brexit is nothing like the Global financial crisis. There is no trigger to a market reaction here like we had in the Global financial crisis. The banking sector is in a much better shape around the globe now. This time looks different. The question is more about what does Brexit do to the European economy, to the British economy, what does it do to the potential future of the Eurozone, what does it mean as an investor or a company that wants to do FDI, invest in the Eurozone. So it is a matter of adjusting to this new world. I hope it does not come close to anything like the Global financial crisis. People are adjusting to this new world and this new world is uncertain, we do not know how the new world will be. But you cannot make something certain that it is not certain.

BUFACCHI: It will take months to sort out these kinds of uncertainties…

DIMON: It will take years. We will not have the real answers for a very long time. There are many agreements, Article 50, when are they going to use it? How aggressive will the British be in negotiating a new relationship with the EU? To find out, it will take many many many months.

BUFACCHI: What about Brexit reversibility? Do you think this would be the best outcome?

DIMON: If you buy a house but you never had a chance to look at it, and then you see it and you do not like it. This can happen. There is nothing wrong to change one’s mind but this is not my decision to make. One look at the actual details, actual FDI, actual complexity of Article 50, the possibility of retaliation, the negotiations with 27 different nations individually. They should say: there is a better path to this: Brexit is unchartered territory. The EU should help making changes for everybody.

BUFACCHI: The market can adjust to anything?

DIMON: J.P. Morgan can adjust to all this. This is why we are here. We adjust every day, what it does to this industry, to that industry, every day you have this kind of analysis ongoing, what it does to this country or that country. So it is very wise for policy makers to move rather quickly and rationally, not to let people think that it is going to be a disaster in a year or two from now, if people think that there is going to be a disaster then you are going to have another adjustment and next time the adjustment wouldn’t be like this one. It would be much worse.

BUFACCHI: Quick decisions can help… but how quick?

DIMON: It won’t be quick. What Europeans can do quickly at this stage is just to make sure they are going to do things thoughtfully. If I were a European policymaker, I would think: how can I make Europe a better place, strong and healthy, how can I improve growth. It is very important to the world we have a strong, healthy Europe. Europe is a bigger economy compared to the States. Creating the Eurozone was a complex process, you cannot get it done without mistakes. Tough times come. Europe has made it through decades of war.
I am still optimistic that we will see the light at the end of the tunnel and things will get better.

BUFACCHI: Year 2016 kicked off in an uncertain way: markets were very nervous from the very beginning about the soundness of the US economy, of China’s soft or hard landing, of the banking sector weaknesses… do you think that Brexit adds a political risk on the top of economic and banking risks?

DIMON: I said sometimes the markets are right, they evaluate a new situation and adjust to it. But at the beginning of 2016, in January and February I thought markets were overreacting on China and the US economy. China turned out to be growing at 6%, China is going to be volatile like most countries everywhere else. There was too much fear on Japan, on the US economy at the start of the year and I thought markets were overreacting. We do not know how the future is going to be, but the US economy is getting along. The US is still the biggest economy in the world. The US is still growing at around 2%, it might slow a little bit but the US is making progress, it is important. I do not think that Brexit will derail the US from its growth path, I could be wrong. Brexit could damage companies, it could damage confidence but how far, we do not know. I do not think Brexit will lead to a global recession.

People voted for Brexit, and they had the right to do so. But now no one really knows what the future will be, even the people who supported a Brexit, because of the wide range of potential outcomes. Brexit has put a lot of uncertainty in the markets and in the economy.

In my opinion, Brexit will slow the economy, the Eurozone, Britain, and it will do so immediately, but we do not know by how much. It does not seem that it is going to push everyone into recession but certainly it will diminish business activities. It will create uncertainty.

The markets will calm down a little bit, as we are already seeing. Then they will start asking themselves what Brexit really means, how is it going to be negotiated, will there be anger, retaliation, will there be reasonable, thoughtful policies as I hope it is going to be, will it be for the UK like it is for Switzerland, Norway, Iceland, and that uncertainty will continue to have an impact on the economy.

In the meantime we at J.P. Morgan will continue to bank our clients. With that I mean that Brexit does not change anything that we do, we will continue to do what we do and serve our clients in Italy, in Europe, in the world. The only thing is, maybe one day we might have to move our people in a Eurozone company to serve our clients in the Eurozone.

BUFACCHI: Do you think Milan, Italy, has a real chance to attract more foreign businesses, global banks and financial institutions given that after Brexit the city of London is looking less attractive?

DIMON: I love Italy, I would love to spend more time in Italy, I am a bit Italian myself as my family has some Italian roots. I look at the “book end” of the question: we need a passport rule, like the one we have now in London. If we have that passport after Brexit, we likely would not have to make any change at all. But I think the European Union will not accept that. It will put more conditions on the UK and might force banks to become smaller in London. We do not know what is going to happen: the worst case is that we might have to relocate a few thousand people to other offices in the Eurozone, though the majority would stay in the UK.

BUFACCHI: You are in Rome and Milan these days to celebrate the 100 years commitment of J.P. Morgan in Italy. How do you view Italy’s role in the world and in the EU after Brexit? Italy is the third GDP in the Eurozone but it isn’t always considered a “reliable” country given its low-growth high-debt problem and its structural problems that have been haunting Italy for 100 years...

DIMON: Italy is growing slower but it has world class companies. J.P. Morgan has done so many transactions to support Italy. We are fully committed. We are helping Italian companies in Italy, one third of our business in Italy is domestic transactions for them, and we take also them around the world, in China, Africa, US and at the same time we take companies from around the world into Italy. For M&A and all, Pirelli-Chem China is an example . We are going to continue to do so, whether Italy is growing slower or not. However I do feel that policy makers should focus on good policy which brings better growth. I think the Prime Minister Renzi has done a lot of positive to improve Italy .. Brexit is an example of rhetoric without policy. It does not work. You need collaboration between companies, government, businesses, based on facts and analysis and not based on slogans: what works, what does not work. I am optimistic your government is making the right changes to improve Italy.

BUFACCHI: J.P. Morgan has historically been very close to Italy, in good times and in bad times. Will Italy be as important after Brexit?

DIMON: It has been 100 years … John Pierpont Morgan, the founder of J.P. Morgan, loved Italy and actually he spent his last days in Italy. I love Italy myself, I wished I could spend more time here. We have been in Italy for 100 years, since the Great financial crisis, steady, and we pride ourselves to be in Italy. We increased our credit exposure to Italy in the worst of times to help support the economy. For the banks, bigger institutions and the government in Italy, it is critical that financial companies like ourselves help, and we have always done it for Italy.

And so we are going to be in Italy regardless of Brexit or not.