JPMorgan’s Dimon: ECB Has Removed Bank Failure Risk for Now

The European Central Bank’s move to provide three-year loans to the region’s banks and accept a wider variety of collateral has eliminated the risk a bank runs short of funds for at least the next year, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said.

“It eliminates bank liquidity or funding problems for at least the next year, that’s a pretty powerful statement,” Dimon said today after his company reported a drop in fourth-quarter net income. “That was the biggest single risk of an uncontrollable surprise right there, so if that’s taken off the table, that’s a good thing.”

ECB President Mario Draghi last month unveiled plans to offer banks 36-month, 1 percent loans through two so-called longer-term refinancing operations, known as LTROs. The plan replaced a 12-month lending facility established by the ECB in October and also allowed banks to use a wider variety of assets as collateral for the loans.

“Europe is trying mightily to solve its problems. I still think the likely outcome is they will muddle through,” Dimon said. “The longer you wait, the higher you run the risk of something disorderly that you can’t really control. I think the ECB took off the worst outcome, i.e. a bank failure.”

The 46-member Bloomberg Europe Banks and Financial Services Index climbed 2.5 percent in December after slumping 8.3 percent in November. So far this year, the index is up 0.3 percent.

Banks in Europe are still shedding so-called risk-weighted assets, or RWAs, because regulators are requiring them to increase their ratios of equity capital to RWAs, Dimon said.

“They’re still reducing RWA by not rolling things over, you can see them selling aircraft loans, trade finance, they’re not participating as much in revolvers, there are certain conduits they’re not doing anymore,” Dimon said. “But that’s now just to create capital, not because they have a funding problem.”