Jamie Dimon says soured loans threaten banks

Deposit runs have resulted collapse of three US banks this year, but another concern is building on the horizon.

Commercial real estate is the area most likely to cause problems for lenders, JPMorgan Chase CEO Jamie Dimon told analysts on Monday.

“There’s always an off-side,” Dimon said in a question-and-answer session during his bank investor conference. “The offsides in this case are probably going to be real estate. It’s going to be some locations, some office real estate, some construction loans. It could be very isolated, it’s not going to be all banks.”

US banks have experienced historically low loan defaults in recent years, thanks to low interest rates and the flood of stimulus money unleashed during the Covid pandemic. But the Federal Reserve has been raising interest rates to fight inflation, which has changed the landscape. Commercial buildings in some markets, including tech-centric San Francisco, could take a hit as remote workers are reluctant to return to offices.

“There will be a credit cycle; my view is that it will be very normal” with the exception of real estate, Dimon said.

For example, if unemployment rises sharply, credit card losses could rise to 6% or 7%, Dimon said. But it will still be lower than the 10% experienced during the 2008 crisis, he added.

Separately, Dimon said banks — especially the smaller ones most affected by the industry’s recent turmoil — need to plan for rates to rise much higher than most expect.

“I think everybody should be prepared for rates to go up from here,” up to 6% or 7%, Dimon said.

Fed concluded last month that mismanagement of interest rate risks contributed to the failure of Silicon Valley Bank earlier this year.

The industry is already building capital for potential losses and regulation by reining in its lending operations, he said.

“You’re already seeing credit tightening, because the easiest way for a bank to retain capital is not to make the next loan,” he said.