Jamie Dimon says deteriorating lending threatens banks

Deposit runs have led to the collapse of three US banks this year, but another worry looms 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 offside,” Dimon said during a question-and-answer session at his bank’s investor conference. “The offside in this case will probably be real estate. It will be certain locations, certain office buildings, certain construction loans. It could be very isolated, it won’t be all the banks.”

US banks have seen 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 raised rates to fight inflation, which changed the landscape. Commercial buildings in some markets, including tech-centric San Francisco, could be affected as remote workers are reluctant to return to their offices.

“There will be a credit cycle, I think that will be completely normal,” with the exception of real estate, Dimon said.

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

Separately, Dimon said banks, especially smaller ones most affected by the recent turmoil in the sector, should plan for a much higher than expected interest rate hike.

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

The Fed concluded last month that poor management of interest rate risk contributed to the failure of Silicon Valley Bank earlier this year.

The industry is already building capital for potential losses and regulation by limiting its lending activity, he said.

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