- Banks looking to build profits can simply decide to start selling loans rather than providing them, says industry analyst Dick Bove.
- JP Morgan Chase has been following this strategy to great effect.
- If too many banks follow that lead, it could pull money from the economy and tip the U.S. into recession, Bove argues.
A significant recession could develop, if banks decide to sell the loans they own rather than make new ones. At present, the pressure to take this path is rising.
Pension funds and insurance companies are in a panic to obtain instruments with higher yields. Banks are fighting to obtain good loans but the pricing environment is not facilitating this.
The easy solution for everyone is for the banks to sell relatively high yielding loans to buyers who want that yield. In so doing, the banks would book significant profits and build funds for reinvesting when yields rise again.
The smartest bank on the block
I would argue that JP Morgan Chase is probably the best run bank in the U.S. because it has superior intellectual capital. This bank is a leader in the industry because it understands markets and it has demonstrated the knowhow to make money from them.
JP Morgan clearly comprehends the current banking dilemma and it is acting to benefit from the situation.
In the 12 months ending in June 2019, bank loans, overall, have risen by just under 5%. JPMorgan’s loan portfolio is up by 0.9%. Year-to-date, in 2019, the bank has reduced the size of its loan portfolio by $27.7 billion. It has reduced loans to the home loan sector by $20.3 billion.