Chief executive of JPMorgan, Jamie Dimon, said that non-bank lenders could withdraw credit support from existing borrowers during the next financial crisis, in a thought exercise composed as part of his annual letter to shareholders. He also said that if non-banks do lend through a stressed scenario they would charge well over the odds for rolling over exposures.
While he lauded the mix of capital providers in the US financial system and the strengthened banking sector since the global financial crisis, as a result of recapitalisation, Dimon predicted that non-bank lenders will behave differently the next time a financial crisis hits from the way banks did in the 2008 crisis.
Having grown their market share in mid-market syndicated lending, from 3 percent a few years ago to 5 percent today, non-bank competitors will be a much more significant part of the marketplace in the next crisis, exacerbating the impact of any negative behaviour.
“It is my belief that in a crisis environment, non-bank lenders will not continue rolling over loans or extending new credit except at exorbitant prices that take advantage of the crisis situation,” he said.
Buyers of credit overall will be reluctant to extend credit, he added. Banks, which were able to do sizeable lending in the last crisis, he continued, would be more constrained next time because of higher capital and liquidity requirements, a result of increased regulation.
In the last crisis, banks continued to lend at fair prices because of the long-term and total relationship involved, Dimon said. “Banks knew they had to lend freely because effectively they are the “lender of last resort” to their clients as the Federal Reserve is to the banks,” he continued.
Credit supply was severely curtailed during the credit crunch which followed the fall of Lehman Brothers in September 2008. According to data provider Dealogic, the US syndicated loan market fell to just over $50 billion in 2009, from around $150 billion in 2008. Investment grade and leveraged lending in the US totalled over $250 billion last year, Dealogic data shows. The same data shows that average loan margins rose over 100bps between the second half of 2008 and late 2009.
Dimon also forecast a more volatile market in the next crisis, which could lead to a more rapid reduction of valuations next time around. Central clearinghouses too, will have far more risk residing in them, he said.