Imposing costly new oversight rules to prevent the collapse of other lenders like Silicon Valley Bank and Signature Bank could end up backfiring with tech companies like Apple coming out the winner, warned J.P. Morgan CEO Jamie Dimon.

“It is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended,” Dimon wrote in his annual letter to the bank’s shareholders. 

“Very often, rules are put in place in one part of the framework without appreciating their consequences in combination with other regulations,” he continued. 

Should the federal government mistakenly roll out a well-meaning, but ultimately onerous one-size-fits-all regulatory regime, the classic role banks provide as financial intermediaries could simply migrate to those sectors unsupervised by U.S. watchdogs.

Companies like Walmart are already providing services similar to a lender, while Apple Pay is now moving from straight-forward payment processing to more unconventional activities like buy-now-pay-later schemes popularized by fintechs like Affirm and Klarna.

“Large tech companies, already 100% digital, have hundreds of millions of customers, as well as enormous resources, in data and proprietary systems—all of which give them an extraordinary competitive advantage,” he wrote. 

Due to its “fairly fanatical” approach to managing risk, Dimon argued his bank is better suited to policing itself than the one-dimensional, academic stress tests imposed by the Federal Reserve on banks with $250 billion in assets or more.  

“Regulation, particularly stress testing…has become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s,” Dimon complained. 

Home loan business at risk from regulatory burden

He cited as proof a two-week period in March 2020, when the stock market fell 24% before the Fed intervened, yet JPMorgan’s trading revenue actually increased thanks to fees it charged its clients for making a market in specific securities. 

“By contrast, the hypothetical stress test had us losing a huge amount of money in market-making, based on the way it is calculated,” he argued. 

Worse, passing the Fed’s stress test may actually lull a bank’s risk committee into a “false sense of security,” Dimon reasoned. 

His biggest implied threat to policymakers included foreshadowing an end to providing home loans to its 79 million U.S. customers at its retail operations led by its Chase subsidiary. 

Everything from capital requirements to legal and reputational challenges were causing more and more lenders to conclude that it “barely makes sense” to service homeowners or hold these loans in their books.

“Unfortunately, it is becoming increasingly difficult for banks to stay in the mortgage business, which ultimately hurts everyday Americans,” Dimon said. “We are hanging on, continuing to hope for meaningful change.”

The problem facing regulators was not necessarily a lack of rules per se, but a failure to enforce them. 

That is because the catalysts behind the demise of SVB were all right there for anyone to see in its financial disclosures: unrealized losses in its securities portfolio, more than 90% of its deposits uninsured, and a customer base highly concentrated in one sector heavily beset by interest rate hikes.

Adding to the burden banks already shoulder in terms of lost earnings power, by holding capital it would otherwise deploy into the economy, as well as lost productivity through man hours needed to meet oversight requirements, the loss of business from lenders to other inherently riskier rivals would only hasten.

“Do you want the mortgage business, credit and market-making, along with other essential financial services, inside the banking system or outside of it?” Dimon asked. “Would nonbank credit-providing institutions be able to provide credit when their clients need them the most? I personally doubt that many of them could.”