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JPMorgan Chase has stepped up the pace at which it is securitising billions of dollars of its loan portfolio in anticipation of proposed new US capital requirements for large banks, according to people familiar with the matter.
The effort pertains to JPMorgan’s loan portfolio around products at Chase, its retail business, including mortgages, auto lending and credit card loans, these people said.
The bank plans to securitise and sell on a higher portion of the loans than it typically has done, they said. That would take loans off its balance sheet so that it would not have to hold regulatory capital against them but JPMorgan would continue to service the loans to maintain its client relationships.
JPMorgan, an industry bellwether as the largest US bank by assets, had $1.3tn in loans at the end of June. Securitisation — the process of pooling loans into a tradable, interest-bearing security — is just one tool that it is using to reduce its risk-weighted assets, one of the people familiar with the matter said.
JPMorgan’s plans to securitise more of its loans come amid more muted activity in the broader securitisation market. US asset-backed and mortgage-backed securitisation issuance has totalled $463bn in 2023, the lowest for this point in a year since 2016, according to Dealogic data.
JPMorgan is the industry’s biggest book runner, working on $62.5bn worth of deals. Many of those deals will involve loans that it did not originate.
JPMorgan declined to comment.
The Federal Reserve in July came out with a proposal that would increase the amount of capital banks have to hold relative to their risk-weighted assets, a ratio that has already risen considerably since the 2008 financial crisis. Capital is used by banks to absorb losses.
Under the Fed’s proposals, lenders would be required to hold an extra $2 of capital for every $100 of risk-weighted assets. JPMorgan chief executive Jamie Dimon has criticised regulators over the proposals, warning that they risked making bank stocks uninvestable.
Nevertheless, the bank’s securitisation plans show that it is taking steps to prepare for some version of the new rules to come into effect, even as they have yet to be finalised. The Fed is soliciting comments on the updated capital requirements in a notice of proposed rulemaking.
“From what we can tell, every large bank is going through some form of ‘RWA optimisation’ or ‘RWA diet’, which in simple terms, reflects balance sheet deleveraging,” Wells Fargo banking analyst Mike Mayo wrote in a research note last week.
Wall Street bankers have warned that the capital rules will disincentivise them from making loans and push more banking activity outside of the regulated banking industry and into the more lightly regulated shadow banking sector. This migration has been under way for more than a decade with the expansion of hedge funds and private credit firms.
Banks caution that this movement of lending activity risks driving up borrowing costs since banks benefit from cheaper deposit funding than those funds and firms. Regulators have argued that higher capital standards are needed to make banks safer and guard against failures such as that of Silicon Valley Bank earlier this year.
