Jamie Dimon And The Banking System

Includes: C, IYF, JPM
by: John M. Mason

By the end of this year, the number of commercial banks in the United States banking system should drop below 6,000 units! According to the statistics released by the FDIC for March 31, 2013, the banking system lost 48 banks in the first quarter of the year. Yes, the number of bank failures that occurred during this quarter was very low, but the number of banks in the banking system continues to decline at a fairly rapid pace.

In fact there are 216 fewer commercial banks in existence as of March 31, 2013 than there were one year ago. And we seem to be on a pace to lose another 200 or so banks this year.

The next important statistic is that the number of smaller banks, those with assets less than $100 million in asset size produced 187 of the 216. The medium-sized banks (according to FDIC definitions), those with asset sizes between $100 million and $1.0 billion, declined by 41 units. That's right, commercial banks with an asset size in excess of $1.0 billion rose by 12 units, all of them coming from the FDIC's medium sized classification.

How about this? The commercial banking industry grew by almost $600 billion over the 12-month period ending March 31, 2013, an increase of about 4.5 percent.

Guess who grew? And, note, this, the commercial banks with more than $1.0 billion in assets accounted for 90.7 percent of the assets in the banking system on March 31, 2012, but accounted for 91.2 percent of the assets in the banking system on March 31, 2013!

And, if one looks at the Federal Reserve statistics, the largest 25 domestically chartered banks in the United States control about 56 percent of the banking assets in the country. Are commercial banks lending again?

The answer to this is yes, net loans and leases at commercial banks rose by 4.8 percent in the year ending March 31, 2013. And, guess who did the lending?

The loans of the smallest commercial banks in the country actually declined by $10.0 billion. The loans in the banks in the medium-sized category remained roughly constant, which means that all the lending taking place in the United States over the past 12 months, in aggregate, was at the largest banks in the country.

Take a look at the future. This trend is going to continue. The smaller commercial banks in the country, those I would define as less than $1.0 billion in asset size, still have a "bunch" of bad loans on their books, they are being overwhelmed with the new reporting requirements that have and are being placed on the banking system, they do not have the capability to compete electronically with the larger institutions, and they do not have the management capabilities to compete in the financial world of the 21st century.

This is a broad generalization, but I will stand by it. And, my family comes from the "community" banking community. And, the future of commercial banking, as I have written many times before, belongs to those that can perform in the world of the 21st century information technology and in the world of big data. Both of these areas "scale" and that will define the size of the commercial bank of the future. And, this doesn't even include two very important areas of the financial world … the credit unions and the "shadow" banks.

Not all individuals need a "commercial" bank. Credit unions are "consumer" banks and being non-profit can create an expense structure that will serve the needs of most "consumers". I still believe that these financial institutions will put a lot of the "smaller" commercial banks out of business, being profit-orientated.

The other growth area in finance, however, is the world of alternative finance … the "shadow" banking world. Before the financial collapse of 2008-2009, alternative finance controlled about the same amount of assets, as did the commercial banking sector. During the past four years or so, the amount of assets in this sector declined relative to the commercial banking sector. Now, however, my estimates show that the two sectors, commercial banking and alternative finance, control about the same amount of assets with the latter growing faster than the former.

Alternative finance is taking over for a lot of what went on in the commercial banking sector in the past. And, this will continue to be the case in the future. And, what about Jamie Dimon?

Jamie Dimon came out on top of the battle to split up his job responsibilities. The battle grew out of the publicity connected with the unfortunate incident connected with the "London whale" and the regulatory scrutiny that grew out of this event.

Let me just say that institutions that engage in risk management are going to experience something like this from time-to-time. Events like this lie along the probability distribution that risk-takers take. Robert Rubin, a major risk-taker in his career, can tell you all about this. There are even some events that are called "black swans."

Yet, JPMorgan Chase (NYSE:JPM) continued to post profits almost as if the "London whale" never occurred. JPMorgan Chase is a good bank and Jamie Dimon is an exceptional leader in a tough time. To me, one thing that separates Jamie Dimon from other bankers is that he is capable of making tough decisions and "change" when change is needed. In my recent post about JPMorgan Chase I made the following comment: "Jamie Dimon, to me, has been an exception in the banking industry in that, historically, he has tended to face situations and deal with them in real time. I believe that this is one of the reasons why he and Sandy Weill finally had to part at Citigroup. Dimon makes decisions, he does not postpone the decision making to deal with problems -- he does not let problems fester."

I also made this comment about one of Dimon's major competitors: "I believe that JPMorgan is a place to focus on if one wants to be on top of what is happening to our financial institutions. In a similar vein, I think Citigroup (NYSE:C) is now a place to watch with its new leader Michael Corbat. Corbat, one should be reminded, is not a 'commercial banker'!"

Maybe this is what is needed in the future of commercial banking and the future of the financial system. Maybe we need fewer "commercial bankers" running things. If information technology and alternative finance are going to rule the future, maybe we need fewer people that think and act like "traditional" commercial bankers leading our financial institutions. In this respect, I think Jamie Dimon is more of a model for what the financial system needs in the future than most other individuals that run commercial banks. So I salute the wisdom of the JPMorgan Chase shareholders for the voting that was just completed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.