Jamie Dimon’s defense of “big banks” in his shareholder letter seems to ignore the experience of the past two years.
Big banks are not “inherently risky,” but the larger they are, the larger the share of deposits and capital they put at risk.
A mistake on risk assessment or a failure to diversify can indeed pose systemic risk if the bank is large. The risk is even higher if the bank’s assets are complex as we have learned.
Mr. Dimon admitted in Congressional testimony that his risk managers (presumably the best in the business) never thought to “stress test” the balance sheet for a decline in house prices in spite of the obviously overdone run-up in prices and supply.
Such a mistake at a smaller bank poses less risk. The larger the bank, the larger the systemic risk.