The European Union (EU) is one of the great collective endeavors of all time where participating countries are striving to form a permanent union of nations for the benefit of all their citizens. In the short run, i.e., in the next year or two, we believe that the Euro Zone, in fits and starts, will work through its problems. It has the will and wherewithal to do so. The politicians of Europe seem to be completely devoted to making this work.
The U.S. economy was, is and will remain for the foreseeable future the mightiest economic machine on this planet. America is home to many of the best universities and companies in the world. It still is one of the greatest innovators. The volume and variation of our inventions created in America are extraordinary – from bold new technologies, like the Internet, to thousands of small, incremental improvements in processes and products that, in aggregate, dramatically improve productivity. And it still has the most entrepreneurial population on earth. American ingenuity is alive and well. Consumers are getting stronger, spending at levels similar to those two-and-a-half years ago, but, instead of spending more than their income, they now are saving 5% of their income. Businesses, large and small, are getting stronger. Large companies have plenty of cash. Medium sized and small businesses are in better financial condition and are starting to borrow again. Global trade is growing. U.S. exports were up 16% in 2010. Job growth seems to have begun. Financial markets are wide open – and banks are lending more freely.
The biggest negative that people point to is that home prices are continuing to decline, new home sales are at record lows
and foreclosures are on the rise. Our data indicates that the rate of foreclosures will start to come down later this year. Approximately 30% of the homes in America do not have mortgages – and of those that do, approximately 90% of mortgage-holding homeowners are paying their loans on time. Housing affordability is at an all-time high.
The U.S. population is growing at over 3 million a year, and those people eventually will need housing. Additionally, the fact that fewer homes are being built means that supply and demand will come into balance sooner than it otherwise would have. That said, housing prices likely will continue to go down modestly because of the continuous high levels of homes for sale.
The ultimate recovery of the housing market and housing prices likely will follow job growth and a general recovery in the economy.
Yes, America still is facing headwinds and uncertainties including abnormal monetary policy and looming fiscal deficits. And while we can’t really predict what the economy will do in the next year or two (though we think it is getting stronger), we are confident that the world’s greatest economy will regain its footing and grow over the ensuing decade.
Dramatically increasing our branch openings: We will move from an average of 120 new branches a year to more than 200 in 2011 and probably more than that in subsequent years. This aggressive build-out is a coordinated effort between our real estate teams; our technology and operations teams; and our management, development and training staff. New branches typically break even by the end of the second year, and, when fully established, which takes several more years, each branch ultimately should earn more than $1 million in profits a year. Yes, we are concerned about technology reducing the need for physical branches, but all our research shows that we still will need branches to serve our customers. While use of the Internet and ATMs has skyrocketed, branch traffic essentially has remained steady. Over time, branches may become smaller, but we still think they will remain essential. (I jrv have my doubts).
If properly designed, countercyclical accounting and capital rules can serve as stabilizers in a turbulent economy. I will mention two issues that underscore the need for this approach, although there are many more. First, loan loss reserving currently is highly pro-cyclical: When losses are at their lowest
point, so are loan loss reserves and vice versa. There are many ways to fix this intelligently while adhering to rational accounting rules. Second, capital rules even under Basel III
require less capital in benign markets than in turbulent times. So at precisely the time when things can only get worse, we require the least amount of capital. This also is easy to fix.
And one additional observation from outside our industry: Federal, state and local governments need to change their accounting standards (as corporations did decades ago) to reflect obligations made today that don’t come due for many years. This one accounting issue allows governments to take on commitments today but not recognize them on financial
statements as obligations or liabilities. Of all the changes being made in the financial system, we believe it is most important to have higher, but proper, capital and liquidity requirements for banks. But these levels cannot be arbitrary or political – they must be rooted in logic and designed for the fundamental purpose of best preparing banks to be able to handle extremely stressed environments – a purpose that always has
been central to JPMorgan Chase’s capital and liquidity positions. We also believe that if the levels of capital are set too high, they can both impede economic growth and push
more of what we refer to as banking into the hands of non-banks.
U.S. banks also have lost significant position. In 1989, U.S. banks represented 44 of the 50 largest financial firms in the world (by market capitalization). More than 20 years later, American banks now number only six of the top 50. While much of this change has to do with the growth of the rest of the world, it is striking both how fast and how dramatic the change has been.
Some of the laws that were written and some of the possible interpretations of rules to come could create competitive disadvantages for American banks. They are adding up, and they bear watching. They are:
• American banks no longer have the ability to use tax-deductible preferred stock as capital (overseas banks do).
• Most other countries have made it clear that they will not accept the Volcker Rule (despite Paul Volcker’s testimony that international regulators would adopt it once they understood it).
• Many of the rules regarding derivatives being adopted in the United States are unlikely to be adopted universally. Certain countries are licking their chops at the prospect of U.S. banks being unable to compete in derivatives. Remember, the clients will go to the place that is the cheapest and most effective for them.
• There are concentration limits, old and new, that constrain American banks’ ability from making acquisitions both here and abroad. Some of these constraints will not
apply to foreign banks.
• There are proposed bank taxes or other arbitrary taxes that could disadvantage large banks – even the FDIC has skewed its deposit insurance to increase the charge to
• Many of the leading economies of the world may not have their large banks maintain additional capital requirements in excess of the 7% called for in Basel III.
• It is clear that some countries’ regulation allows for a much less conservative calculation on risk-weighted assets.