Largest US bank prepares for a 'potentially catastrophic' government credit default

JP Morgan has begun scenario-planning for how such an event would affect markets, client contracts and its capital ratios, chief executive Jamie Dimon says

JP Morgan Chase headquarters in New York. The biggest US lender is preparing for the possibility of the country hitting its debt limit. Photo: Reuters

JP Morgan Chase has begun preparing for the possibility of the US hitting its debt limit. However, policymakers are expected to find a solution to avoid that "potentially catastrophic" event, chief executive Jamie Dimon said.

The country's largest lender has begun scenario-planning for how a potential US credit default would affect the repo and money markets, client contracts, its capital ratios and how ratings agencies would react, Mr Dimon said.

"This is like the third time we've had to do this. It is a potentially catastrophic event," he said.

"Every single time this comes up, it gets fixed, but we should never even get this close. I just think this whole thing is mistaken and one day we should just have a bipartisan bill and get rid of the debt ceiling. It's all politics."

Congressional Democrats are scrambling to find a way to raise the government's $28.4 trillion borrowing cap before the Treasury Department runs out of means to service the nation's debt. US Treasury Secretary Janet Yellen has said the Treasury will likely exhaust extraordinary measures by October 18.

Democrats have prepared votes to head off a government shutdown and a potentially economically-crippling US credit default on Tuesday, but a quick resolution appeared unlikely in the face of continued Republican resistance.

Fiscal brinkmanship has become a regular feature of US politics over the past decade thanks to continuing partisan polarisation, with debt ceiling deals coming down to the wire in 2011 and 2017.

Bloomberg reported last week that Ms Yellen had called the leaders of the biggest Wall Street financial firms to recruit them in her campaign to pressure Republicans to agree to a deal. The Treasury declined to comment on the report.

Mr Dimon said as part of its preparation, the bank was combing through its client contracts, a resource-intensive process.

"You've got to check the contracts to try to predict it out ... If I remember correctly, the last time we got prepared for this, it cost us $100 million," he said.

Mr Dimon spoke to Reuters at the opening ceremony of the bank's new branch in south-east Washington, which is part of JPMorgan's effort to promote racial equity by boosting its presence in underserved communities.

The branch is the eleventh of its kind in cities including New York, Detroit, Los Angeles and Chicago, since 2019. As well as providing traditional services, these branches work with local community groups to provide free skills training and other small-business support.

"It's not a traditional bank branch. We want it to be very welcoming; we want it to be attractive," Mr Dimon said.

This is like the third time we've had to do this. It is a potentially catastrophic event

Jamie Dimon,
chief executive of JPMorgan Chase

Following nationwide Black Lives Matter protests last year, JP Morgan pledged $30 billion over five years to advance racial equity. That includes originating 40,000 new mortgages and 15,000 small business loans to Black and Latino communities.

The investment underscores how large corporations are increasingly embracing social, environmental and governance issues amid pressure from investors.

Addressing racial equity is also a priority for US President Joe Biden's administration, which has said bank branch "deserts" perpetuate inequality by reducing access to credit.

Mr Biden's acting Comptroller of the Currency Michael Hsu earlier this month said that he would scrap contentious changes to fair-lending laws led by his Donald Trump-appointed predecessor and start a fresh review with other banking regulators.

Rules around the Community Reinvestment Act, where regulators score banks on how well they serve poor communities, need to be regularly modernised to account for technology-driven changes in banking, Mr Dimon said. The overall law is good for the country, he added.

"It is very complicated, very slow, very late, very hard to measure," he said, adding that CRA assessments should also be performed in real time, as opposed to a retrospective review every few years.

"Does it actually capture everything? No. Is it real time? No. Is it politicised? Absolutely."