JPMorgan Chase & Co. Warns a Rapid Rate Rise Could Shake the Financial System

Key Points

• JPMorgan’s main concern is a rapid rise in interest rates destabilizing the broader financial system by leaving some institutions unable to adjust their balance sheets quickly, weakening confidence and intensifying competition for funding.
• The bank is preparing for rates to move in either direction and has stress-tested its balance sheet, but sees inflation and the Fed’s neutral rate as key uncertainties. JPMorgan has generally avoided longer-dated investments, though Bristow said that stance is harder to maintain at current market prices.
• Bristow said liquidity is a binding constraint across the banking system and warned that a smaller Federal Reserve balance sheet could further reduce liquidity unless accompanied by reforms. He also said capital is being retained to support strong growth in lending opportunities, with the sustainable dividend remaining JPMorgan’s primary capital-return commitment.

JPMorgan Chase & Co. NYSE: JPM is preparing for interest rates to move in either direction, but a rapid rise poses a broader risk to the financial system, according to Charles Bristow, the bank’s head of treasury and chief investment officer.

Bristow said the bank has stress-tested its balance sheet against higher rates and does not have a single “nightmare scenario.” His greater concern is that a sudden repricing could leave other institutions unable to adjust their balance sheets quickly, undermine confidence and trigger competition for funding.

“If the move to higher rates needs to be too fast, it will have very non-linear and unpredictable outcomes,” he said.

Rates and balance-sheet strategy

Bristow said the market was pricing just over two interest-rate hikes through the end of 2027, near what he considers the lower end of a credible range. While he said market pricing was not far off on a probability-weighted basis, he remained cautious about the risk of rates moving higher.

For JPMorgan’s investment portfolio, he said the more consequential question is where the market settles on the economy’s tendency toward inflation and the Federal Reserve’s neutral rate. Medium-term rate forwards have risen to around 5% from 3% about four years ago, he said, reflecting a shift toward an environment of higher growth, investment and inflation pressure.

The bank’s approach to managing the duration of its balance sheet has not fundamentally changed, Bristow said. JPMorgan has generally avoided longer-dated investments because it believed markets had underpriced a return to a period of substantial public- and private-sector infrastructure investment. He added that current pricing makes that position harder to maintain than it was four years ago.

He also said a proposed accounting change allowing hedging of held-to-maturity securities could give the bank room, at the margin, to take more interest-rate exposure in low-credit-risk instruments within that portfolio.

Buybacks, deposits and capital rules

Asked about a decline in third-quarter share repurchases, Bristow said the bank’s sustainable dividend is its primary capital-return commitment. Beyond that, JPMorgan weighs buybacks against potential uses of capital over the medium term.

He said growth in risk-weighted assets was running at approximately a double-digit compound annual rate and that the bank was already finding organic opportunities to deploy capital. Retaining capital for future opportunities was prudent, he said, given the bank’s cost of capital and demand for financing.

On deposits, Bristow said customers have had considerable time to seek higher rates since the 2022–2023 cycle. He said JPMorgan’s balances are behaving as expected for a bank focused on operating deposits, including retail checking accounts and balances associated with payments and custody services. The bank is nevertheless stress-testing outcomes in which policy rates move beyond their recent range.

Bristow welcomed greater transparency and averaging in bank stress testing, saying a more predictable process could reduce the capital buffer banks hold against volatility. He also supported aspects of proposed changes to capital requirements for globally systemically important banks, including smoothing and smaller surcharge buckets, but said regulators should recalibrate coefficients more fully and explain a proposed change involving short-term wholesale funding.

Some proposed rules could make low-risk intermediation businesses unable to meet return hurdles, he said. JPMorgan would continue serving clients across business lines, he added, though the rules could discourage investment in such activity at the margin.

Liquidity constraints and AI

Bristow said he saw no signs of market stress, but that liquidity was a binding constraint for the banking system. He pointed to a relationship between marginal lending and bank borrowing as evidence that lending is increasingly being funded through borrowing rather than excess cash.

JPMorgan has about $1.3 trillion in liquid assets, he said, while noting that other high-quality assets receive no liquidity value under current treatment. He argued that the distinction can curtail systemwide liquidity capacity.

A smaller Federal Reserve balance sheet would withdraw liquidity from a system already operating at a constraint, Bristow said. If policymakers pursue that path, he said, they should consider liquidity reforms alongside it to avoid liquidity cliffs or higher borrowing costs.

Asked whether AI agents could make deposits move more quickly between institutions, Bristow said banks need to monitor potential structural changes over the coming years. He expects adoption to be gradual and does not see it fundamentally changing the checking-account business model. Still, he said, faster-moving and more rate-sensitive deposits could reduce banks’ demand for longer-duration assets and affect credit availability.

About JPMorgan Chase & Co. (NYSE:JPM)

JPMorgan Chase & Co is a global financial services company headquartered in New York City. Through its businesses, the company provides banking, lending, investment banking, payments, asset management and wealth management services to individuals, businesses, governments and institutional clients.

Its major business segments include Consumer & Community Banking, which offers deposit accounts, credit cards, mortgages, auto loans and other financial products; Commercial & Investment Banking, which provides corporate lending, advisory, underwriting, trading, treasury and payments services; and Asset & Wealth Management, which serves individual and institutional investors with investment management, brokerage and related advisory services.

JPMorgan Chase serves customers in the United States and operates internationally through offices and businesses in major financial centers around the world.

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