Bank Failures Don’t Pose a Risk to the Economy or Financial System

The crisis, she said, was a “reminder of how important it is to take every single basis point of risk management seriously.”

Erdoes’ skills were tested again in the past week as the failure of Silicon Valley Bank and two smaller banks sparked fears of a broader financial panic. Don’t bet on it: “Today’s financial system is stronger than at any time before us, and it will emerge even more resilient,” she said.

Global client assets in the businesses Erdoes oversees have swelled to $4 trillion from $1.7 trillion during her tenure, while revenue jumped to $17.7 billion last year from $7.9 billion in 2009. Erdoes also has expanded the business into new markets, such as China and Ireland, and overseen a string of acquisitions.

Along the way, she has earned a reputation as one of the most powerful executives in asset and wealth management. And, for the fourth straight year, Barron’s has recognized her on its annual list of the 100 most influential women in U.S. finance.

Barron’s spoke with Erdoes on March 7 about the U.S. economy, why she believes investors can’t ignore China, and the work that

JPMorgan Chase

(ticker: JPM) is doing with the government of Ukraine. In a follow-up call on March 16, she discussed the past week’s banking turmoil. An edited version of the conversations follows.

Barron’s: You weathered the 2008-09 financial crisis. Are the current problems systemic?

Mary Callahan Erdoes: On our client call this week, we said we don’t think this crisis is systemic. The biggest banks in the U.S. have other buffers [compared with Silicon Valley and other failed banks], particularly a much bigger piece of long-term debt on their balance sheets, and much more diversified types of clients, including institutional and retail clients.

One of the lessons is that when something looks too good to be true, it just might be, and that comes from high deposit rates and low loan rates. Another lesson is that these problems will go away, and regulators will help make that part of the banking system even stronger.

During the 2008 financial crisis, the large institutions were the focus. Today the loan-to-deposit ratio for U.S. banks is at a multidecade low, and capital ratios are at a three-decade high. Both of those statistics are telling you that the large, systemically important institutions are doing all the things that we hoped would happen when we tried to make the banking system stronger.

This crisis is about the smaller regional banks that don’t fall under the same guidelines and regulations as the large banks, and we’re seeing the consequences of that. We are hoping for regulations that will help these regional banks think about risk management in the same way as the large institutions.

Is the U.S. economy headed for a soft landing or a recession?

The U.S. economy is still healthy, and that hasn’t changed because of two regional bank seizures. Right now, the market has us at a 65% chance of recession. If you do a CEO poll, 93% of CEOs think that there is going to be a recession and are preparing for it. It’s their No. 1 concern.

The higher markets go without factoring in all of the potential challenges, the harder the fall when they do, and that can land us in a more pronounced recession than people may be predicting. The chances of that are high and getting higher. Some would say certain sectors, such as housing, are already in a recession. Housing sales are down almost 40% year over year, a faster drop than in the financial crisis. The world feels very healthy, but it’s also very fragile. If the Federal Reserve can orchestrate a nice, gentle glide path back down to 2% inflation, that would be great.

The Fed hasn’t been able to orchestrate that glide path so far. Hasn’t it become even more difficult now?

The Fed has a difficult task because of stresses on the financial system. They are going to have to figure out how to maintain their march toward reining in inflation while not rocking the boat during a fragile time. That may cause them to have to rethink the path that they were on. I don’t think it will fundamentally reshape the beginning and the end of their path; it just may shape how they get there in between.

Last year was a tough one for a balanced portfolio. How should investors think about a 60/40 stock/bond portfolio now?

The good news is that the starting point for future returns on a 60/40 portfolio is so much better than it has been. It is exciting to think about adding new money to a 60/40 portfolio. In our 2023 long-term capital-market assumptions, our forecast annual U.S. dollar return for a 60/40 portfolio over the next 10 to 15 years went from 4.3% last year to 7.2%.

What is the outlook for alternative investments?

For clients who don’t need daily liquidity in 100% of their portfolio, alternatives are an important diversifier of alpha sources [returns in excess of the market] and an enhancer of after-tax risk returns. An allocation to alternatives has been proven over time to add several hundred basis points [hundredths of a percentage point] of return while not augmenting your risk profile. This is an important consideration for investors, even if alternatives aren’t a large part of their portfolio.

College and university endowments, which are heavily invested in alternatives, lost an average of 8% in the fiscal year ended on June 30, 2022, the worst showing since 2009. How does that square with your advice?

When we advise clients on alternatives, we’re thinking about real estate, infrastructure, private credit, and private equity, all the way from the large- cap buyouts to distressed situations, which can be appealing during times of [market] distress.

Investing in China has been challenging for many investors. What is your China strategy?

China is important to us. After 100 years of being in the country, and several years of working on our joint venture there, J.P. Morgan was given approval in January to own 100% of our joint venture, the China International Fund Management Co. Why is this important? There are many things one could say, including “because I want to make mutual funds for people in China or for people who are outside of China putting their money inside of China.” Those are the basics of why you would own a money manager.

For me, it is so much more. It is irresponsible to be an investor of any kind or in any asset class in today’s world if you don’t understand China. You never have to put a dollar of your money in China, but you can’t possibly just invest in your local country and not need an understanding of what is happening with one of the largest dynamic, moving economies of the world—where it is headed, its policies, the effects of being closed during Covid, and now open, or the semiconductor-chips issues.

How might U.S.-China tensions affect J.P. Morgan’s China business and investments?

We try to keep immune from the relations of any particular country because J.P. Morgan operates in so many countries around the world. We try to keep that separate and distinct from the geopolitical issues.

How important is geographic diversification for investors?

It is important to stay focused on diversification and not be wedded to any one thing that worked in the past that might not work in the future. The problem of home-country bias creeps into almost everyone’s portfolio, not only in terms of stocks and bonds, but also currencies. Covid limited people from constantly thinking about exploring the world. You didn’t know what was happening in your own town, let alone other countries. Home-country bias has become even worse, and it is time for people to reset. There are fantastic opportunities out there, including in economies that are emerging.

ESG, or investing through an environmental, social, and governance lens, is important to the bank, but there is now a backlash. How are you navigating it?

It isn’t any one person’s job to say what is right or wrong in the world. Everybody wants a safer world, a greener planet, and better education. But not everybody wants those things with the same priority. What’s most important is to increasingly allow the portfolio managers or clients to have their own say. We want our portfolio managers to say with purpose and fervor, “I like this company because it may be in an industry that is unfavorable in today’s market, but they’re really making a change.” We want the individuals whose money it is, or the pension fund, to express their views either through their guidelines or the democratization of voting on various issues.

J.P. Morgan recently sent a delegation to Ukraine to meet with President Volodymyr Zelensky. What was the purpose of the trip?

J.P. Morgan is the No. 1 debt issuer for Ukraine sovereign debt and has been since 2010. When the war broke out, we worked swiftly to be able to give them a two-year payment deferral to help them keep functioning. The delegation that traveled to Kyiv, Ukraine, in February was a combination of people who are highly skilled at lending, government affairs, rebuilding, and alternative investing. The discussion focused on the development and coordination of refinancing and restructuring strategies, management of government liquidity, and a road map for digitizing the economy.

Digitization and artificial intelligence are changing the world. How are you applying it at J.P. Morgan?

We spend over $12 billion a year on technology because we have to ensure the security of assets flowing around the world. AI has the potential to create so many opportunities—people say it’s about 100 times more powerful than when the internet was invented. AI is used for many things across JPMorgan Chase, first and foremost in anti-money-laundering procedures to look for patterns of fraud and money laundering.

Thanks, Mary.

Write to Lauren Foster at lauren.foster@barrons.com