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JPMorgan chief Jamie Dimon tried to defend his bank's size and scope by suggesting that community banks are just as vulnerable in a crisis. But he succeeded only in proving that Wall Street firms will make the same mistakes all over again unless the government takes steps to disincentivize their risky behavior.
April 9 -
Mounting yet another defense of JPMorgan Chases size and scope, Chairman and CEO Jamie Dimon pointed out the fallibility of smaller banks in his annual letter to shareholders.
April 8 -
The fight over the Dodd-Frank Act's $50 billion threshold will determine whether some banks get a respite from tougher rules, but it may also shape how the industry and lawmakers think about threats to the financial system more broadly.
March 31
JPMorgan Chase chief Jamie Dimon has probably been right about a lot of things during his highly successful career in banking. But he is wrong
Big banks, by their very nature, are more risky. Common sense and data show that this is so. Some of Dimon's own comments to shareholders also perfectly illustrate this fact.
The bigger an organization gets, the more complex it becomes, and the more difficult it is for people in the organization to keep everything from customer service to fraud prevention working the way it should. As size increases, risk management also becomes more and more difficult.
In fact, size and risk are correlated in everything from big government to big business to big houses.
A big house means more grass to mow and more wood for termites to chew. A family living in a house with five toilets might not notice a leak in one until a huge water bill arrives. Compare that to the experience of someone living in a 700-square-foot studio. When a toilet's leaking, they know almost instantly.
Big businesses have more distance from the customer and less ability to see whether an employee is doing something that could really hurt the company. If you run a hot dog stand, customers tell you immediately if they need more mustard on the dog. Contrast that with McDonald's. The distance between the person making your cheeseburger and the CEO of McDonald's is pretty significant, so it's harder for McDonald's leadership to know if a worker is serving a cold burger with the bun slapped on wrong. Personally, I have not bought a hot hamburger placed squarely on a bun from McDonald's in 20 years. I'd say the chances are slim that CEO Steve Easterbrook knows that information.
Employing more people also means allowing more opportunities for greed, complacency and dishonesty. The larger the institution, the greater the chance there is that a problem will be overlooked. JPMorgan has racked up
Dimon asserts that "many large banks had no problem navigating the financial crisis, while many smaller banks went bankrupt." JPMorgan Chase has paid about $8 billion to the Federal Deposit Insurance Corp. to help pay for the winding down and sale or closing of those banks, he says. It's true that of the 520 banks that have failed or received assistance from deposit insurance funds since 2008, all but 19 were banks with $10 billion in assets or less, according to data from the Federal Deposit Insurance Corp. And it's also true that the bigger banks' estimated losses to the insurance funds totaled $25 billion, or a little more than half the losses tied to the smaller banks.
However, this is not a complete picture. Smaller banks received less than a dime of every dollar provided under the
So while it's true that poor risk management (especially of commercial real estate loans) was correlated with many failures of small banks with $1 billion in assets or less, these smaller banks had developed safety nets based on widely accepted accounting rules in the form of loan-loss allowances. However, the crisis brought on by big banks proved to be too much for these safety nets to cover. The loan allowances developed by smaller banks became inadequate "to absorb the wave of credit losses that occurred once the financial crisis began," according to a
These problems still exist today. A
Federal banking regulators continue to support the view that bigger is always riskier. FDIC vice chairman Thomas Hoenig recently
Dimon is right that there are some benefits to size and complexity, and that there are things companies can do to fight the negatives. But the fact remains that the bigger an organization gets, the riskier it becomes.
Brian Hamilton is chairman and co-founder of financial analysis software and risk management
company Sageworks. Mary Ellen Biery, research specialist at Sageworks, also contributed to this article.