Dimon: Small Banks Are Pretty Risky, Too

Mounting yet another defense of JPMorgan Chase's size and scope, Chairman and CEO Jamie Dimon pointed out the fallibility of smaller banks in his annual letter to shareholders, which was released Wednesday.

"Larger does not necessarily mean more risky," Dimon wrote. "For example, many large banks had no problem navigating the financial crisis, while many smaller banks went bankrupt" (by which he presumably meant "seized by regulators").

Many smaller institutions have failed because they were overly concentrated in specific geographies, Dimon noted, citing as an example Texas banks that went bust during the 1980s when oil companies and real estate there tanked.

While these observations are hardly original, they seem somewhat brazen coming from Dimon, the head of a bank that received $25 billion from the government during the financial crisis. While JPMorgan did not need the money to weather the crisis, several other large institutions did. Citigroup and Bank of America both had to be bailed out twice by the U.S. government – an offer that was not extended to the hundreds of small banks that collapsed during the crisis.

Indeed, small banks argue that it was the actions of the largest institutions, including JPMorgan, that helped put the economy on the path that caused many of their fellow institutions to fail.

You wouldn't know it from reading Dimon, though.

"Since the crisis began seven years ago, more than 500 smaller banks have gone bankrupt, and JPMorgan Chase has contributed approximately $8 billion to the Federal Deposit Insurance Corporation to help pay for the resolution of those banks," Dimon wrote.

Community banks also cite banks like JPMorgan as the reason why they are struggling to deal with a slew of new regulations under the Dodd-Frank Act, a law that was drafted with "too big to fail" banks in mind. Further, community banks often bemoan the reputational damage they say they've incurred as a result of the financial crisis.

However, elsewhere in the letter Dimon acknowledged that small banks have an important role in the banking system, along with midtier institutions and behemoths like the $2.2 trillion-asset JPM.

"There is a great need for the services of all banks, from large global banks to smaller regional and community banks," he wrote.

The letter also cautions that banks in general stand to lose business to nimbler, less regulated competitors, such as startup online lenders – though he showed a hint of skepticism about that particular crowd's longevity.

"The firms can lend to individuals and small businesses very quickly and – these entities believe – effectively by using Big Data to enhance credit underwriting," Dimon wrote (emphasis added). "They are very good at reducing the 'pain points' in that they can make loans in minutes, which might take banks weeks."

And Dimon gave a nod to the need to build a real-time payment system. He even used the "B" word.

"You all have read about Bitcoin, merchants building their own networks, PayPal and PayPal look-alikes," he wrote. "Payments are a critical business for us – and we are quite good at it. But there is much for us to learn in terms of real-time systems, better encryption techniques, and reduction of costs and 'pain points' for customers."

The whole JPM shareholder letter can be found here.