JPMorgan Chase & Co (JPM) 24th Annual Credit Suisse Financial Services Forum

JPMorgan Chase & Co (NYSE:JPM.PK) 24th Annual Credit Suisse Financial Services Forum February 14, 2023 1:35 PM ET

Company Participants

Jeremy Barnum – CFO

Conference Call Participants

Susan Katzke – Crédit Suisse

Susan Katzke

So okay. Good afternoon. I’m Susan Katzke. For those of you with us virtually, I cover the large-cap banks at Credit Suisse. And next up for the banks. I’m pleased to be here with JPMorgan’s CFO, Jeremy Barnum. Thank you for coming back for another fireside chat, 2 for 2 in your CFO tenure. We’ve got a lot of ground to cover. So let’s get started.

Jeremy Barnum

Yes, and thanks for having me. Happy to be here.

Question-and-Answer Session

Q – Susan Katzke

Happy to have you back. So let’s start with your latest thinking. We started here with everybody today with your latest thinking on the macro environment. From your vantage point as the CFO of JPMorgan, what are your observations on the current state of the economy from what you’re seeing on consumer spending [Technical Difficulty]. What you’re hearing from your wholesale clients?

Jeremy Barnum

Yes. Yes. So let’s do consumer first. So — in the grand scheme of things, things haven’t changed particularly very much since earnings. Probably at the margin, things are slightly more positive. So just to recap, card spend in the fourth quarter was quite solid, especially in light of how strong it was in the prior year in light of the reopening dynamics. One of the things we’ve looked at is the sort of cash buffer. At the margin, that’s incrementally more positive. And we also see some other [Technical Difficulty] consumers compromising on discretionary spend in order to protect nondiscretionary spend, which we would tend to see as maybe an early indicator of some slight distress, and that’s still not happening.

What we are seeing inside consumer spending is just the expected rotation between goods and services. So a little bit less spending on goods, a little bit more spending on services. So T&E, for example, and dining, remain elevated. So broadly a continuation of the same themes. We can talk about the outlook a little bit, but in terms of what the data is showing us right now on the consumer side, it’s [Technical Difficulty].

Susan Katzke

It’s rates, monetary policy. What, if anything, has changed since earnings in January when I think you were talking about 2 rate hikes this year, we’ve already had one, then a pause, talking about recession mid- to late 2023, mild. Like where are we?

Jeremy Barnum

Yes, yes, yes. So I mean, I guess after the data this morning, things are moving a little bit. So I mean not quoting any internal views, but just looking at the forwards, it looks like as of this morning relative to earnings, we’ve got another couple of hikes in the forward. So at this point, it looks like peak funds at something like as what I checked a couple of hours ago. So that’s not trivial. That’s notable.

Our sort of official central case economic outlook, which has us going into a very mild recession towards the end of this year and unemployment rate peaking at 5.1%, that outlook hasn’t changed. I would have said before this morning that like the vibes were a little bit towards maybe upward revision risk there. Just like it — I think there was a journal piece yesterday to the effect of, oh, it’s no longer hard versus soft landing. It’s maybe like no lending. That narrative seemed to have some legs maybe. Maybe after today, we’ll see, right? And I mean it’s the tension of the moment. Like how hard does the Fed have to go? And can we engineer this sort of glide. But I think big picture relative to earnings, no big change.

Susan Katzke

Okay. So let’s dig into banking fundamentals a little bit and see if we stick with that, no real change drift. The HA data, so it’s telling us that loan growth has moderated and deposits in aggregate are declining. So let’s talk a little bit first about loan growth, and then we’ll dig deeper into your cash position and deposit flows.

Jeremy Barnum

Sure. So loan growth, I think the most notable loan growth story remains the card loan growth story really in terms of what matters. And as we said in earnings, I think what’s significant there is the continued normalization and revolving balances. So we’ve seen robust growth there, and I know there’s been a lot of press coverage about credit card debt being at all-time highs. But what that coverage misses a little bit is that revolving balances per account still remain below pre-pandemic levels. So we continue to see that sort of normalizing and that, therefore, will be a tailwind for NII this year, all else equal. Yes.

Susan Katzke

You ready to go to the commercial side?

Jeremy Barnum

No, I just forgot. Did you want me to cover wholesale too?

Susan Katzke

Well, we’re going to go to that side, I guess. That was the next question. So on the commercial side, let’s talk about where the demand that you’re seeing, if any, because we’re seeing C&I slow pretty materially. Where is the demand coming from? And where is it that you’re willing to lean in?

Jeremy Barnum

Yes, yes.

Susan Katzke

Or not.

Jeremy Barnum

So I think as I said at earnings, I think in the grand scheme of things, wholesale loan growth should be relatively modest this year and will be mainly, I think, a function of what type of economic environment we’re in. Obviously, a harder landing will be associated with less loan growth, all else equal. Within that, what we’re seeing right now from the demand side is actually pretty robust demand in the larger corporates. And to my prior comments about sentiment in the C-suite, I think smaller corporates a little bit more gun shy and a little bit less demand there with also the backdrop across the board in C&I of revolver utilization having normalized, the end of the normalization trend post COVID. So that’s a tailwind for growth that’s missing there.

I think the other thing that’s worth saying in terms of where to lean in. I mean, of course, we’re always going to lean in as part of acquiring new customers and clients. And — but also, there’s a little bit of a narrative about overhang in the financing markets as part of the whole bridge book narrative. And as I said at earnings, we’re wide open for that. We are seeing a little bit more inquiry on the M&A side and people wanting to adjust their capital structures. And for the right deals on the right terms, we’re there. We think the capacity is there. And you are — even though DCM is still challenged relative to last year’s first quarter on a sequential basis, you are starting to see some pickup right now.

Susan Katzke

Okay. And I’m curious in the competitive environment not just pricing, but what are you seeing in terms of the appetite of other banks and nonbank private credit providers that are challenging the demand?

Jeremy Barnum

Yes. I mean, on the pricing side, I think not much to say there, pricing has stabilized and maybe a little bit better in some pockets but not a big driver. And broadly, I think that any given deal is still highly competitive. So nothing much to say there in terms of the conventional landscape. In terms of private credit, that, as you know, has been a big focus of ours for some time, and we’ve taken some steps to really complete our product offering. So that’s some of the value proposition, the private credit providers were offering in terms of fast, unitranche deals with possibly slightly worse pricing, all else equal, when the clients’ priority was speed. We’ve sort of developed that into our suite so that we really have a full offering and can compete head-to-head with both banks and private credit providers always within our risk appetite for the deals that we think make sense.

Susan Katzke

Okay. So let’s switch gears into deposits because that seems to be everybody’s favorite topic right now. And let’s start with how you’re thinking about industry-wide deposit growth, both on the consumer and the wholesale side? And how much does the deposit growth even matter given the beta, the mix shifting? Let’s start with growth and then what kind of growth.

Jeremy Barnum

Yes. So let me take your second question first because I think we should be honest, like deposit growth still matters. And the flip side of that is that deposit attrition still matters. Whatever you believe about where you’re having the attrition or the growth in which segment and what you believe about betas, all else equal, there’s still margin there. And therefore, from a — reflective of the outlook and the operating performance, it does matter what happens balances.

At this point, our balance perspective is sort of modest declines in balances both the gross consumer and wholesale. The dynamic there is a little different where early on, in the hiking cycle, we saw faster declines in wholesale as those kind of nonoperating high beta balances that we expected would have tried and that we were never really planning to fight for kind of left. Now things are a little bit more balanced. And it’s really just a function of, in a world where you have QT, it’s the old equation of the balance between loan growth, QT and RRP. RRP seems pretty sticky where it is. We’ll see how that goes. That could change.

As I said earlier, loan growth is not a particularly big driver here one way or the other. So that QT, all else equal for the system, is going to produce lower deposit balances in the near term.

Susan Katzke

Okay. And then let’s talk about your view on beta in this rate cycle and you can wrap beta into mix as well, if you like. But based on your guidance, I assume you expect to see higher betas industry-wide. Maybe talk about kind of how you expect to see this progress comparing it, maybe we just skip over last cycle and go back 2 cycles or more appropriate comparison.

Jeremy Barnum

Yes, because I do think, increasingly, I think you’ve written about this. Like the last cycle comparison seems increasingly irrelevant. We talk about how we have no playbook for — no recent playbook for rates at this level. And obviously, with the last cycle having ended in the low 2s, it’s not really telling us much.

So just at the risk of being too pedantic about terminology, I guess what I would say is that, certainly, our outlook embeds the expectation of higher rates paid, all else equal. And the question is what’s driving that. And so when we talk about betas, we do need to remember that at this point, the funds curve has a couple of hikes, a couple of cuts, whatever, but it’s a lot less volatility in the short-term rate outlook than what we experienced last year.

The question is really about lags. The question is about the passage of time as opposed to like what the Fed does. And what we believe is that what clearly was unique in recent history about this cycle is how fast it was. So the amount of hiking and the period of time that, that quotient was a lot. And therefore, it’s not surprising in that context that reprice lags have been more elevated than they would have normally been. And from our perspective, it’s just common sense to expect that to catch up more or less independently of what happens with the Fed.

Susan Katzke

Okay. So then let’s go to cash. as we kind of round our way through your balance sheet here. You still sit on more cash than most of your peer banks. So let’s talk about this, the evolution of your thinking around the cash balances and where you expect they’ll ultimately end up as we move through to the end of this rate cycle.

Jeremy Barnum

Yes. So I mean, trying to get — obviously, when you talk about cash and the balance sheet and the portfolio, a lot of it has to do with various relatively nuanced choices about how we manage that. And philosophically, as you’ve seen from us, we really believe strongly in managing that on an economic basis, trying to maximize value for our shareholders over the long term, somewhat independently of short-term, you might call them, cosmetic impact.

So you’ve seen us, for example, take some losses as we have sold securities that we found expensive and got into securities that were cheaper and that will have an impact on earnings, not on capital, and we mostly try to ignore that stuff as we just focus on maximizing value. So the cash position in simple terms, one reason for it to be elevated is simply the recognition of the amount of surplus liquidity in the system, the recognition that with QT coming, all else equal, deposits are going to come down. And it’s just easier and more straightforward to let that flow out of the cash balances rather than have to readjust securities positions when that happens.

So that’s one important part of the cash story. The other piece is just relative value on the front end of the yield curve. So in a world where, generally speaking, in the front end, cash has been the best asset, you’re just not seeing us deploy cash into repo opportunistically as we have often done in the past in order to maximize value. Beyond that, you start to get into sort of complicated nuances about duration and stuff like that, which I’m not going to bother to go into right now.

But in the end, that’s going to be just an outcome. In other words, the cash balance is going to be an outcome of the liquidity goals of the company, convenience and value optimization over the long term. But all else equal, you would expect that to come down just as a function of — with QT, frankly.

Susan Katzke

Okay. So if we wrap up this segment and go to your guidance, on the January earnings call, you established an outlook for NII in 2023 of $74 billion ex markets, $73 billion gap. I would tell you, I mean, back in the fall when you first started to speak to a decline from the fourth quarter ’22 run rate, some of us thought, I will take the guilt on that, some of us thought you were being overly conservative. And I think what we’ve realized is that your assessment was more realistic than conservative. So at this juncture, with kind of the change to the forward curve and loan demand is there any change to your assumptions on the path of interest rates on balance sheet growth and mix? And is that influencing kind of where you are on that guidance?

Jeremy Barnum

Yes. Yes. So just starting with sort of the answer that I think everyone cares about first, we’re not going to revise guidance today. And let me explain why and it goes a little…

Susan Katzke

We didn’t expect you to…

Jeremy Barnum

It goes a little bit back to your guilts’ comment. I think guilt is a little bit of a strong word in the sense that the stuff is actually complicated. And I think the level of uncertainty is quite elevated right now. So a lot of what we talked about at earnings was really sort of emphasizing the unique moment that we’re in and the amount of uncertainty that there is around how all these dynamics are going to play out. So the guidance that we gave at the time didn’t feel particularly conservative to us and felt appropriate in light of the various factors in play.

Since then, the way things have played out across a range of different dimensions, probably if push, I would have to say that the current guidance is a little bit more — is maybe on the conservative side relative to what we were at earnings. But we think that’s appropriate conservatism because as much as there are some indicators that might lead you to think things would be a little better, there are other indicators that are reminding us of the uncertainty, it could easily make things be less good.

So for now, no change in guidance, and the emphasis is really on the uncertainty given all the moving parts that are in that dynamic right now. And I would say, too, that I wanted to mention this before, but when we think about — we talked about this a little bit on the call, but when we think about the drivers of these outcomes and the uncertainty, a lot of it is fundamentally deposit reprice, and it’s about the customer strategy and the franchise strategy overall. And that is a strategy that is about protecting primary bank relationships over the long term, not fighting for every single dollar of deposits. So that informs a lot of our thinking, and those decisions are made in the competitive marketplace thinking about the franchise over the long term, and that’s one of the key variables.

Susan Katzke

Okay. All fair. So let’s go to the next favorite topic when it comes to JPMorgan. Its expenses and investments. And sitting here last year, this was a very hot topic. I think it was the first one on our list, and we spent the majority of our time here. But now it’s perhaps less of a hot topic given that while you did run expenses at the targeted level last year and you invested on plan, you also generated a higher ROTE than most had anticipated at the start of the year. So just to level set on expenses, your guidance this year is to approximately $81 billion, which, in fact, incorporates less of a percentage step-up relative to the 2022 increase. So remind us where you are in terms of that structural expense increase. And are you now kind of normalizing back to the 3%-ish annual pace of increase?

Jeremy Barnum

Yes. So — and I know you’ve got a bunch of stuff to cover on expenses. So just bring me back if I don’t.

Susan Katzke

I will. I will.

Jeremy Barnum

But let’s do structural first. So just sort of a reminder about our expense framework, right? Just to make — to try to explain things more effectively, we break down our changes and expenses between investments, volume and revenue-related. And the third bucket, which sometimes I think we should call all other rather than structural because what it actually is, is all other and labeling it as structural makes it seem like it has more meaning than it actually does.

But as it happens, if we get the other — the sort of bucketing into the other 2 categories, right, what’s left is generally something that is sort of structural, although it also has occasionally some onetime-ish type things in it. So for example, this year, we’ve got about $0.5 billion extra FDIC expected expenses in the structural outlook.

But maybe a way to generalize away from the point is to say well what is our outlook for the impact of the sort of elevated inflation on our expense base because, of course, we’re not immune from that. And I think we, like everyone else, hopes and expects and believes that the Fed will do their job. Despite this morning’s numbers, we still think inflation will tend to come under control. Views differ on when or whether it will hit 2.5% versus 3% versus 3.5% and how aggressive the Fed will have to be to achieve that.

But broadly, we do expect those inflationary effects to be less significant as we go into 2024. Again, with nuances about things like the FDIC charges. And we see some evidence in our own internal data around — of that, specifically, for example, if you look at employee attrition, where labor was obviously one of the major inflationary drivers, not just for us, but for everyone. And you do see that the attrition is obviously an indicator of the hot labor market tailing off a little bit and normalizing more towards pre-pandemic levels. So we see that as an encouraging early sign at least from our perspective. Yes, sorry.

Susan Katzke

No, that’s okay.

Jeremy Barnum

Less structural, yes.

Susan Katzke

Less structural, good, check. Now investment spending. You — I mean, JPMorgan is a huge bank, right? So you’ve got lots of priorities. But how — I guess, maybe the better way to ask this is how the priorities shifted in 2023.

Jeremy Barnum

Yes. So actually, on the investment side, the priorities really haven’t shifted that much. So the themes are pretty much the same. And the same that we — as you said, that we laid out sort of exactly for the first time, but with a bit more of a sense of urgency, last year initially at this conference and then in a lot more detail at our Investor Day. And of course, we’re doing Investor Day again this year. So you’ll get a lot more detail from all of my colleagues who are much closer to all the decisioning and all the priorities around the investment spend at our Investor Day.

But big picture, priorities haven’t changed, still looking to — on the continuum of investments, things that are relatively tangible, relatively measurable, even though, in many cases, they’re not particularly short term. So classic examples of that are card marketing, where we think our card results really speak for themselves. The investments seem to be working there. Bankers and branches, where we’re very happy with our branch expansion strategy, and we feel that the resilience of the deposit franchise is being helped by that, among other things. And moving on towards things that you might call a little bit more R&D like famously, our international consumer strategy, for example.

And then in the background, other investments, which are a little bit less about revenue generation and a little bit more about securing the resiliency and the scalability of the franchise where you start to get into technology and cloud and all of that type of stuff. But the themes are very consistent.

Susan Katzke

So can — on the technology and the cloud and that broader infrastructure modernization, and I think most people think of the consumer platforms first when we think about that modernization, but where are you on the progress on that journey of modernizing and realizing the scale economies Because that’s really — I mean, those scale economies ultimately are how you’re confident in sustaining a 17% ROTE.

Jeremy Barnum

Exactly, exactly. That’s exactly right. And so yes, the reason we see these as like investments is that it’s transformational work that we believe will significantly improve our scalability and efficiency as well as our ability to innovate and our resiliency, not just this quarter or next quarter or this year or next year, but really for the next decade.

I should say that, as Jamie always emphasizes, we’ve been modernizing and upgrading and improving our technology plan forever, really. So that’s kind of par for the course. I think the reason it’s gotten a little bit more attention this — in recent times is that as we can see, I mean, the thing of the moment is like ChatGPT and stuff like that. But like the rate of change of technology out there seems to have increased quite a bit. And so catching up and getting all the benefits from that takes some really conscious effort and forces you to make some decisions about willingness to invest through cycles, through different moments with a long-term view.

And so whether it’s cloud or anything else that we’re doing on the investment side, we try to strive — of course, where possible, everything that we do is super rigorous and on an NPV basis with clear metrics, and we’ll talk more about how those are going at Investor Day, payoff times, tangible things and stuff like that, but also having the confidence to do the things that are a little bit harder to prove but we are equally confident that they’re critical and, at the same time, also having a feedback loop and being tough on ourselves and recognizing when we need to change course.

But all of that stuff just operates on longer time horizons than the quarterly earnings time horizon. And that’s kind of part of our DNA. That’s the way we run the place. We got to think long term. Long term doesn’t mean insensitive to the current environment, but it means discipline, requires like seeing through the moment and that was a little bit the story of last year. And in some sense, it hasn’t really changed this year.

Susan Katzke

So from where we sit, since we’re going to wait for Investor Day to get all the updates on the consumer platform, I think I will be satisfied by considering that the returns that you’re generating and then the market share gains across the business would validate the investments that you’re making.

Jeremy Barnum

Yes. I mean, look, I think we should be honest, right? Any given quarter or even any given year’s returns, are probably not a proof point for that year’s investments because, in truth, we are benefiting today from investments that have been made over the prior decade, and many of the investments that we’re making now will pay off over the following decade. so — but yes, of course, we take pride in the fact that we are investing aggressively for the long term and delivering very good current returns. And of course, 2022 wound up proving that out, although we have to acknowledge that some of those were passive effects of one kind or another, but that’s fine. We’ll take it.

Susan Katzke

You’ll take it. So we’re going to zig zag a little because we did revenue in NII. We went to expenses. Now we’re going to go kind of back to the revenue categories in the markets. And I’m not going to totally step on Troy Rohrbaugh’s toes who is speaking tomorrow.

Jeremy Barnum

That’s okay. I’ll do — he is happy for me to [indiscernible].

Susan Katzke

We’re going to do a little bit in the context of how you’re assessing the broader operating environment. I want to spend a minute on markets and banking and talk about kind of your view on whether we call it normalization of banking revenue, but how are — let’s just be blunt, how’s the quarter progressing in terms of banking and trading and then how do we put this in the broader context of what you do consider to be kind of normal levels of both.

Jeremy Barnum

So let’s do banking first. So as of right now, remembering that like last year’s first quarter was particularly strong, we’re expecting banking revenue to be down about 20% this quarter. So we’ll see how it goes, but that’s what it looks like to us right now.

On the market side, last year’s first quarter was also exceptionally strong. So we would be thrilled if we could duplicate last year’s first quarter performance. And the quarter is starting out relatively strong. But as we sit here today, our central case is to probably come in a little bit worse than last year. But obviously, we’re not even halfway through the quarter yet, so a lot of uncertainty out there and mostly how it goes.

In terms of the broader pools type narrative, I think the bankers are telling me that they kind of think that the 2019 fee pool, the IB fee pool, is — that’s kind of the new normal or the old normal or the new normal is the same as the old normal effectively. I think maybe they’re being a little bit pessimistic about that. I would have thought that you have some background growth there for a variety of reasons, but we’ll see. You know the strategy there. At the end of the day, we fight to get our fair share of the fee pool by having the best people and the best holistic offering, and we feel good about that.

On the market side, it’s interesting. Of course, we were pleasantly surprised by the strength of the performance in 2022 and by the relative lack of normalization. So with that as background, all else equal, we would tend to think that 2023 should see some normalization in revenues relative to 2022. And as you look forward, you have that old narrative of market should maybe grow a little bit below GDP growth because you’re going to have margin compression and competition. But on the other hand, in a big global franchise like ours with our big emerging markets footprint, you would expect to benefit from global growth, not just U.S. growth and also financial deepening in emerging markets. So that’s a tailwind.

This year, in particular, despite the normalization comments that I made, it’s kind of a noisy environment. You’re seeing that even today with the numbers. So it’s very active. Things continue to be interesting. Clients continue to be active. So we’ll see. We’ll see how it goes.

Susan Katzke

Okay. Well, I think that’s probably a little bit more constructive an update than I might have anticipated. So we’ll take that.

Jeremy Barnum

Okay. If you say so.

Susan Katzke

No. The stability in the markets wallet is kind of is where you’ve been. I think investment banking a little bit of optimism there that we start to see, we move from DCM to ECM and eventually see the M&A backdrop.

Jeremy Barnum

I’m temperamentally more optimistic. So I’m sure my colleagues might disagree a little bit. But in any case, I think these businesses, we just try to do our best every day and the outcome is what it is.

Susan Katzke

Understood. Understood. So let’s shift gears to capital management. And I think there are a lot of moving parts to the capital equation, whether it’s the G-SIB surcharge, the Basel IV or Basel III end game, the SCB. How should we think about the capital target for JPMorgan and what you’re aiming for now? I think it’s a 13.5% CET1 in ’24.

Jeremy Barnum

Yes. So let’s build this up piece by piece. So the capital target is pretty simple. Right now our requirement is 12.5% and we’re going to have one more G-SIB step based on our — the current structure of our balance sheet based on the way the lags work in the first quarter of next year. So as of the first quarter of this coming year, I guess, 2024, requirement will be 13%. We’re targeting roughly a 50 basis point management buffer. So that’s how you get to 13.5%. Importantly, assuming that the SCB this year is unchanged, and we can talk about that if we have time. Obviously, there are puts and takes there.

But in simple terms, 12.5% goes to 13%, 50 basis point management buffer, unchanged SCB gets you to a 13.5% target in the first quarter of next year.

Susan Katzke

Okay. So then let’s clarify your comments around capital returns. On the January earnings call, you put out a $12 billion number. And that was an — I’m curious, is that an estimate of your actual appetite for share repurchase? Is it what your estimated capacity is? Like what are you doing here?

Jeremy Barnum

So the way I would say that is like this is our attempt to be helpful for better or for worse. So what do I mean by that? We went from a moment of like not doing buybacks as we were building to the new higher capital requirement to saying that we’re going to reinitiate buybacks. And it’s sort of like, okay, if you kind of need a first draft of your model, what’s a reasonable number to put in there based on reasonable outlook for organic capital generation, reasonable outlook for RWA growth, obviously, the dividend and whatever other uses of capital there might be.

So I think we were just trying to help people sort of reanchor themselves in the new normal. Having said that, our capital hierarchy fundamentally hasn’t changed. And the share buybacks are at the end of the capital hierarchy. I won’t repeat the litany of as you’ve heard it a million times over the years. So what we actually do will be a function of a variety of factors. We can talk about some of them, if you want. Basel IV potentially is one of them.

But really, the point is that where we sit here with the guidance that we’ve given and all the other factors, there is a ton of organic capital generation in the company. So as we reanchor ourselves into that, that’s a starting point.

Susan Katzke

Okay. And then when you think about capital returns, how are you thinking about the dividend in a world with potentially rising capital requirements given the cost of the dividend to you in the SCB framework?

Jeremy Barnum

Yes, that’s a good question, and it’s a really interesting philosophical question, I think, for all banks, forgetting about us, but just for the industry. As you say, it’s objectively the case that dividends are made expensive by the way that the SCB requires you to prefund 4 quarters of dividend. And so you can imagine that, all else equal, when Boards are thinking about what the most efficient way is to do distributions. That, at the margin, that sort of feature in the SCB maybe gives people pause about the choices between dividends and buybacks.

It’s worth noting that the way the math works, you can still grow the dividend without growing the SCB if you have RWA growth. Big picture for us, though, like nothing’s changed. Our philosophy of having a healthy and sustainable dividend is unchanged. Our capital strategy is change. But you do raise an important policy point, I think. And it’s one of the many bits of the current assemblage of various requirements and constraints that we think is less than ideal for the system.

Susan Katzke

So speaking of the system and the regulatory framework, I know you’ll argue that loss absorbing capacity is substantial, assuming everything other than the darkest of scenarios. And you look at risk, and you guys have documented over and over again how much risk has shifted outside, off your balance sheet outside of the banking system, even though it’s still adjacent to the banking system, et cetera.

So what do you think — we’ve certainly interpreted Michael Burrows commentary to assume that there’s an upward bias to capital requirements. What do you think the Fed and the regulators are solving for an imposing more stringent capital requirements on the banks?

Jeremy Barnum

Yes. Look, I mean, frankly, I think the first and simplest answer to this, the boring bureaucratic answer is that they signed the Basel awards, and there’s stuff coming down the pike that they need to implement for better or for worse. So whether it’s FRTB, the securitization stuff, standardized RWA, you know the drill. So they’re presented with that, and they have to do it.

Now the theory was that the Basel III end game was not supposed to increase capital on the system as a whole. And as you just alluded to, the old corals line was capital in the system is about right. The new bar line is capital in the system is high, but is it high enough. And it’s at the low end of the so-called optimal capital regime according to some academic studies. So that’s a pretty clear signal from bar that he’s comfortable with a Basel III endgame outcome, which does increase capital requirements on the system.

Now the question is like capital requirements or actual levels of capital and also which banks. Even among the G-SIBs, they’re different mix. So there’s a lot of different outcomes here. And of course, they’ve sort of alluded to the fact that, in addition to implementing the Basel III end game, they’re going to do their holistic review. And so there’s a lot of levers and a lot of moving parts inside of all that, that enable them to generate a range of outcomes.

It seems good that the signal is that in so doing, they will accept outcomes that involve higher capital. We obviously believe that’s not necessary. And we hope that whatever the increases are, if that’s actually what winds up happening, are reasonable because, at some point, you really are starting to damage the functioning of the system by pushing things that are most efficiently done inside of the regulated perimeter outside of the regulated perimeter and thereby fueling unhealthy procyclicality, ironically in the process of trying to make the system safer.

So there’s a lot in there. But I think that in answering that question, I’ve maybe indirectly touched on your buyback point because I know that part of the reason that you’re a little bit skeptical of our $12 billion number, and skepticism presumes that it’s like a commitment of some sort, which it’s not, as I highlighted, is that there’s an argument in light of all the uncertainty from Basel IV for building more ahead of that.

I guess my counterargument to that a little bit is that there’s a lot of time and a lot of uncertainty both on the time dimension and on the surface area dimension. And given the amount of organic capital generation that we have, it’s an interesting and nuanced point about sort of like when you would consider making adjustments as a function of when you get information.

There’s going to be an NPR, final rule, holistic review. Not clear if that’s in the NPR, et cetera, et cetera. So those are some of the factors that we’re thinking about.

Susan Katzke

Understood. It’s an interesting time when I’m more conservative in my estimates than you, and I haven’t put that…

Jeremy Barnum

Oh, that doesn’t sound good. I don’t like really like how that sounds.

Susan Katzke

No, that doesn’t — I have not I read the $12 billion of capital as the capacity, not necessarily what you were putting to work. And I do completely appreciate how much free capital the bank is generating. And I think it’s important to acknowledge that, given how much free capital you’re generating, you really do have the capacity to buy back and fund the dividend and fund your balance sheet growth, et cetera. So…

Jeremy Barnum

In the end, it’s just math. We’re just trying to make the math easier.

Susan Katzke

Understood. So let’s not end our conversation on regulatory. Let’s talk about, for our last minute here, just when we think about 2023 and how well — no year or single year will define success for the bank. How will you define success for 2023 as a year?

Jeremy Barnum

Yes. Well, first of all, come to Investor Day, and you’ll get lots of updates and a lot of detail on all the targets that we put out there last year and how those are going. So I think that’s my single biggest answer to how we define success. But of course, beyond that, as much as we talk about generating returns through the cycle, we like to see ourselves hitting those targets in any given year as well, and we’re optimistic about that and also, obviously, doing our job for our clients, customers, communities, surveying everyone and bringing the whole firm with all of its power to the U.S. and to the world. So…

Susan Katzke

That sounds like more of the same, which is a very good thing.

Jeremy Barnum

Indeed.

Susan Katzke

Thank you for coming back and joining us today, Jeremy.

Jeremy Barnum

Thank you, Susan.

Susan Katzke

Thank you.