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Souring Loans Pose Threat to Banks, Warns Jamie Dimon

Jamie Dimon says souring loans threaten banks

Jamie Dimon says souring loans threaten banks

JP Morgan Chase CEO, Jamie Dimon, has warned that commercial real estate is the area most likely to cause problems for lenders in the US. Speaking during his bank’s investor conference, Dimon said that “there’s always an off-sides…the off-sides in this case will probably be real estate. It’ll be certain locations, certain office properties, certain construction loans.” Dimon believes that a credit cycle is inevitable, but it will be normal with the exception of real estate. He also advised that banks need to plan for interest rates to rise far higher than most expect.

Deposit runs have led to the collapse of three US banks this year, but another concern is building on the horizon. Historically low loan defaults experienced by US banks over the last few years due to low interest rates and government stimulus are beginning to change. The Federal Reserve has had to hike interest rates to fight inflation, which is leaving commercial buildings in some markets, including tech-centric San Francisco, at risk as remote workers are reluctant to return to offices.

FAQs:

What did Jamie Dimon say about commercial real estate?

JP Morgan Chase CEO, Jamie Dimon, warned at his bank’s investor conference that commercial real estate is the area most likely to cause problems for lenders in the US. He said that “there’s always an off-sides…the off-sides in this case will probably be real estate. It’ll be certain locations, certain office properties, certain construction loans.”

Why is commercial real estate at risk?

Remote workers are reluctant to return to offices in some markets, including tech-centric San Francisco, which is leaving commercial buildings in those areas at risk. The Federal Reserve has hiked rates to fight inflation, which is causing a change of landscape.

What else did Jamie Dimon advise banks to prepare for?

Jamie Dimon advised that banks need to plan for interest rates to rise far higher than most expect as the Federal Reserve is already building capital for potential losses and regulation by reining in its lending activity. He said that “You’re already seeing credit tighten up because the easiest way for a bank to retain capital is not to make the next loan.”

Jamie Dimon says souring loans threaten banks
Jamie Dimon says souring loans threaten banks

Banks at Risk as Loans Turn Bad, Warns Jamie Dimon

Three banks in the United States have failed this year due to deposit runs, but another concern is looming – commercial real estate. This area is expected to cause problems for lenders, according to JP Morgan Chase CEO, Jamie Dimon. Speaking at his bank’s investor conference, Dimon warned that “there’s always an off-sides.” He explained that “the off-sides in this case will probably be real estate. It’ll be certain locations, certain office properties, certain construction loans. It could be very isolated; it won’t be every bank.”

Despite historically low loan defaults for US banks over the last few years, the Federal Reserve has hiked rates to tackle inflation, which has led to changes to the banking landscape. Commercial buildings in some markets, including San Francisco, may be affected as remote workers continue to be reluctant to return to offices. Dimon believes that “there will be a credit cycle. My view is it will be very normal” with the exception of real estate.

Banks are making preparations for potential losses and regulation by reining in lending activity and building capital. “You’re already seeing credit tighten up because the easiest way for a bank to retain capital is not to make the next loan,” Dimon explained. Separately, Dimon also advised that banks, particularly smaller ones, will need to plan for interest rates to rise far higher than most expect, with rates potentially reaching 6% or 7%. The Federal Reserve attributed poor management of interest-rate risks as a contributing factor to the failure of Silicon Valley Bank earlier this year.

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