This article written by Simon Johnson is another in a long line of commentary that is not supported by facts or solutions. Obviously there is a lot of stress directly stemming from the situation in Europe and it will effect banks. Currently banks in the United States have some of the highest capital and liquidity ratios in their history. If the Euro were to break up in a disorderly way, nobody would be prepared including banks, insurance companies, citizens of those countries, conglomerates, etc. There is very little one can do to effectively hedge these types of risks, similar to it being difficult to hedge against the risk of a nuclear disaster. Fortunately cooler heads generally prevail which is why a disorderly unraveling of the Euro is unlikely. It isn’t in anybody’s best interests.
What the world needs is economic growth. While this type of worry mongering article seems helpful, it serves to stifle growth when implemented into policy, by forcing banks to horde capital, as opposed to lending to counteract the huge fiscal deleveraging that we are seeing across the globe. It doesn’t make sense to raise capital for the sake of raising capital, when there are more productive uses for that capital. In terms of giving a large number reflective of JP Morgan’s balance sheet and then showing how $50 billion in losses could potentially wipe out the bank, it would be more instructive to show where those losses would likely come from. Also a bank that generates $20 billion in profits per year can offset many of the potential risks that are out there. Let’s not forget we’ve just been through the worst financial crisis since the Great Depression and JP Morgan came out stronger than just about any other bank in the world. This is the type of article that is written to get in the news but I think it is totally irresponsible without providing any facts, figures, or numbers. The reality is that these types of figures generally show the strength of the banks versus anytime in their history which is why it is much more convenient to be intentionally vague when writing these types of bearish, and fear driven articles.