JP Morgan Chase 2013 Annual Report Download - page 30

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capital requirements. In the new regulatory
environment, the transmission and eect of
monetary policy by the Fed will be dierent
from the way it was in the past. It is very
hard to calculate this impact, although I’m
sure the Fed is taking it into consideration.
In addition, business financing needs are
likely to be moderate because businesses will
be able to fund many of their projects with
their own excess cash and strong earnings.
Normalization is a good thing
Ultimately, a normalization of interest
rates, capital flow and allocation without
central bank interference, concurrent with
a strengthening economy, has to be a good
thing – something that we all eventually
should want even though it probably will
be accompanied by volatile movements in
interest rates. When rates do normalize, we
know one thing for certain – it will happen
dierently from what people expect. And
my guess is that when it happens, it will
be faster than people expect. A normalized
interest rate curve might have short-term
interest rates at 3%-4% and 10-year Treasury
bond rates at 5% plus or minus. If the yield
curve returns to those kinds of levels in a
healthy economy, we all will be okay. And
the Fed already has made it absolutely clear
that it will normalize its monetary policy
only as the economy strengthens.
Focus on the real economy vs. the money
economy
The real U.S. economy includes 145 million
people who get up and go to work every
day, trying to improve their lives and the
lives of their family (and counter to what
you read in the newspapers, 80% of those
people are happy with their job). The real
economy includes millions of companies
serving clients every day and generally
building to expand and meet their customers’
order flows. In fact, most people in the real
economy appropriately pay very little atten-
tion to the money economy. I would remind
our readers that there are 320 million Ameri-
cans, but only a small fraction watch CNBC
or read The Wall Street Journal. In the real
economy, what matters to most people is
one’s family, job and quality of life.
Those of us who operate in the money
economy are very sensitive to interest rates –
maybe overly sensitive. And we should look
through the volatility at interest rates, which
will almost definitely be there as the Fed
changes its policy. Volatility in interest rates
will not necessarily dampen real growth in
the real economy.
Rising interest rates (all things being equal)
will be a big plus for your company
Even as we have grown deposits and market
share in many of our businesses, profit
margins have been squeezed because of
abnormally low interest rates. If interest
rates rise to the normalized scenario that I
described earlier, our net interest margins
could expand 2.2%-2.7%, increasing our net
interest income and profits by approximately
$6 billion after-tax, all things being equal.
This, of course, would take place over three
to five years and not in a straight line. But,
indeed, all things are not equal – many other
factors will have an impact on our business
flows and results.
We have been vigilant in trying to analyze
the eect of interest rates on interest
margins (we have managed the balance sheet
to benefit from rising interest rates), and we
also have been vigilant in trying to predict
the eect of interest rates and Fed mone-
tary policy on deposit flows. There is little
question that the Fed’s QE policy increased
deposits substantially and that, as QE is
reversed, it will reduce deposits. It is possible
that we could see significant outflows of
certain types of deposits over the years – an
event for which we will be prepared.
Banks still need to be there in good times
and in bad times — but it will be a little
harder in the new world
In the last financial crisis, many banks
stood against the tide. They were there for
their clients and continued to fund busi-
nesses, cities, schools, hospitals and invest-
ments when many other banks wouldn’t or
couldn’t do so. It is not because these banks
were irrational but because that is their job.
Imagine yourself being a client of a bank,
and, at the first sign of trouble, the bank
runs like a rabbit.