Finance

JPMorgan Chase said late Wednesday that the Federal Reserve overestimated a key measure of income for the giant bank’s recent stress test, and that its losses under the exam should actually be higher than what the regulator found.
The bank took the unusual step of issuing a press release minutes before midnight ET to disclose its response to the Fed’s findings.
The error means that JPMorgan might require more time to finalize its share repurchase plan, according to a person with knowledge of the situation.

JPMorgan Chase CEO and Chairman Jamie Dimon gestures as he speaks during the U.S. Senate Banking, Housing and Urban Affairs Committee oversight hearing on Wall Street firms, on Capitol Hill in Washington, D.C.
Evelyn Hockstein | Reuters

JPMorgan Chase said late Wednesday that the Federal Reserve overestimated a key measure of income in the giant bank’s recent stress test, and that its losses under the exam should actually be higher than what the regulator found.
The bank took the unusual step of issuing a press release minutes before midnight ET to disclose its response to the Fed’s findings.

JPMorgan said that the Fed’s projections for a measure called “other comprehensive income” — which represents revenues, expenses and losses that are excluded from net income — “appears to be too large.”
Under the Fed’s table of projected revenue, income and losses though 2026, JPMorgan was assigned $13 billion in OCI, more than any of the 31 lenders in this year’s test. It also estimated that the bank would face roughly $107 billion in loan, investment and trading losses in that scenario.
“Should the Firm’s analysis be correct, the resulting stress losses would be modestly higher than those disclosed by the Federal Reserve,” the bank said.
The error means that JPMorgan might require more time to finalize its share repurchase plan, according to a person with knowledge of the situation. Banks were expected to begin disclosing those plans on Friday after the market closes.
The news is a wrinkle to the Federal Reserve’s announcement yesterday that all 31 of the banks in the annual exercise cleared the hurdle of being able to withstand a severe hypothetical recession, while maintaining adequate capital levels and the ability to lend to consumers and corporations.

Last year, Bank of America and Citigroup made similar disclosures, saying that estimates of their own future income differed from the Fed’s results.
Banks have complained that aspects of the annual exam are opaque and that it’s difficult to understand how the Fed produces some of its results. More

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The Federal Reserve said Wednesday that the biggest banks operating in the U.S. would be able to withstand a severe recession scenario.
Each of the 31 banks in this year’s regulatory exercise cleared the hurdle of being able to absorb losses while maintaining more than the minimum required capital levels, the Fed said in a statement.
This year’s stress test included giants such as JPMorgan Chase and Goldman Sachs, credit card companies including American Express and regional lenders such as Truist.

Federal Reserve Board Vice Chair for Supervision Michael Barr testifies before a House Financial Services Committee hearing on the response to the bank failures of Silicon Valley Bank and Signature Bank, on Capitol Hill in Washington, D.C., on March 29, 2023.
Kevin Lamarque | Reuters

The Federal Reserve said Wednesday that the biggest banks operating in the U.S. would be able to withstand a severe recession scenario while maintaining their ability to lend to consumers and corporations.
Each of the 31 banks in this year’s regulatory exercise cleared the hurdle of being able to absorb losses while maintaining more than the minimum required capital levels, the Fed said in a statement.

The stress test assumed that unemployment surges to 10%, commercial real estate values plunge 40% and housing prices fall 36%.
“This year’s results show that under our stress scenario, large banks would take nearly $685 billion in total hypothetical losses, yet still have considerably more capital than their minimum common equity requirements,” said Michael Barr, the Fed’s vice chair for supervision. “This is good news and underscores the usefulness of the extra capital that banks have built in recent years.”
The Fed’s stress test is an annual ritual that forces banks to maintain adequate cushions for bad loans and dictates the size of share repurchases and dividends. This year’s version included giants such as JPMorgan Chase and Goldman Sachs, credit card companies including American Express and regional lenders such as Truist.
While no bank appeared to get badly tripped up by this year’s exercise, which had roughly the same assumptions as the 2023 test, the group’s aggregate capital levels fell 2.8 percentage points, which was worse than last year’s decline.
That is because the industry is holding more consumer credit card loans and more corporate bonds that have been downgraded. Lending margins have also been squeezed compared to last year, according to the Fed.

“While banks are well-positioned to withstand the specific hypothetical recession we tested them against, the stress test also confirmed that there are some areas to watch,” Barr said. “The financial system and its risks are always evolving, and we learned in the Great Recession the cost of failing to acknowledge shifting risks.” 
The Fed also performed what it called an “exploratory analysis” of funding stresses and a trading meltdown that applied to only the eight biggest banks.
In this exercise, the companies appeared to avoid disaster, despite a sudden surge in the cost of deposits combined with a recession. In a scenario where five large hedge funds implode, the big banks would lose between $70 billion and $85 billion.
“The results demonstrated that these banks have material exposure to hedge funds but that they can withstand different types of trading book shocks,” the Fed said.
Banks are expected to begin announcing their latest share repurchase plans on Friday.

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In the cartoon “SpongeBob SquarePants”, Mr Krabs, purveyor of krabby patty hamburgers, is a frequent and ruthless price-gouger. He can get away with it since he has no competition, save for the unappetising Chum Bucket. McDonald’s, a fast-food chain that flips real-world hamburgers, can only dream of Mr Krabs’s pricing power. It has been forced into a fast-food price war.Since June 25th Americans hungry for a deal have been able to get a sandwich, fries, chicken nuggets and soft drink under the golden arches for just $5. Burger King, a rival fast-food chain, is matching the offer with a $5 meal deal of its own. The two are following in the footsteps of Wendy’s, which is temporarily adding an ice cream to its long-standing Biggie Bag combo. Starbucks, seemingly determined to protect its reputation for high mark-ups, is pricing a sandwich and a coffee at $6. McDonald’s calls this the “summer of value”; economists call it deflation. However labelled, the development is heartening for both consumers and Federal Reserve officials, who hope to reduce interest rates before the year is out. More

Morgan Stanley is pushing further into its adoption of artificial intelligence with a new assistant that is expected to take over thousands of hours of labor for the bank’s financial advisors.
The assistant, called Debrief, keeps detailed logs of advisors’ meetings and automatically creates draft emails and summaries of the discussions, bank executives told CNBC.
The program, built using OpenAI’s GPT4, essentially sits in on client Zoom meetings, replacing the note-taking that advisors or junior employees have been doing by hand, according to Jeff McMillan, Morgan Stanley’s head of firmwide artificial intelligence.

Bing Guan | Bloomberg | Getty Images

Morgan Stanley is pushing further into its adoption of artificial intelligence with a new assistant that is expected to take over thousands of hours of labor for the bank’s financial advisors.
The assistant, called Debrief, keeps detailed logs of advisors’ meetings and automatically creates draft emails and summaries of the discussions, bank executives told CNBC. Morgan Stanley plans to release the program to the firm’s roughly 15,000 advisors by early July, one of the most significant steps yet for the use of generative AI at a major Wall Street bank.

While the company’s earlier efforts involved creating a ChatGPT-like service to help advisors navigate the firm’s reams of research, Debrief brings AI into direct contact with advisors’ most-prized resource: their relationships with rich clients.
The program, built using OpenAI’s GPT-4, essentially sits in on client Zoom meetings, replacing the note-taking that advisors or junior employees have been doing by hand, according to Jeff McMillan, Morgan Stanley’s head of firmwide artificial intelligence.
“What we’re finding is that the quality and depth of the notes are just significantly better,” McMillan told CNBC. “The truth is, this does a better job of taking notes than the average human.”

Consent required

Importantly, clients have to consent to being recorded each time Debrief is used. Future versions will allow advisors to use the program on corporate devices during in-person meetings, said McMillan.
The rollout will serve as a real-world test for the vaunted productivity gains of generative AI, which took Wall Street by storm in recent months and has bolstered the value of chipmakers, tech giants and the broader U.S. stock market.

Morgan Stanley’s wealth management division hosts about 1 million Zoom calls a year, the bank told CNBC. While estimates vary, one Morgan Stanley advisor involved in the Debrief pilot said the program saves 30 minutes of work per meeting; advisors typically spend time after meetings creating notes and action plans to address client needs.

Arrows pointing outwards

Morgan Stanley’s new Debrief program, a new AI tool for wealth management advisors based on OpenAI’s GPT-4.
Courtesy: Morgan Stanley

“As a financial adviser I’m doing four, five or six meetings a day,” said Don Whitehead, a Houston-based advisor who’s been testing the software. By “having the note-taking service built in through AI, you can really be invested in the meeting, you’re actually a lot more present.”
It remains to be seen what advisors will do with the hours reclaimed from essential grunt work. In a sense, Morgan Stanley’s projects in generative AI amount to a “grand experiment in productivity,” said McMillan.
If, as McMillan and others believe, advisors will spend more time serving clients and prospecting for new ones, the technology should boost Morgan Stanley’s growth in assets under management, as well as retention of clients and advisors.
Morgan Stanley’s wealth management division is one of the world’s largest with $5.5 trillion in client assets as of March; the firm wants to reach $10 trillion.
It will take at least a year to determine whether the technology is boosting advisor productivity, McMillan said.
“I’m the analytics guy, but the advisors will tell you that they’re at their best when they’re engaging” with clients, said McMillan. “None of them will tell you they love taking notes or looking at research reports, right? That’s not why they got into this business.”

The broader vision

Ultimately, Morgan Stanley’s vision for AI is creating a layer of technology that seamlessly helps advisors perform all of their tasks — sending proposals, balancing portfolios, creating reports — with simple prompts, Morgan Stanley wealth management head Jed Finn told investors in February.
Many of the core tasks set to be automated, like parsing contracts and opening accounts, are universal throughout Morgan Stanley, including at trading and banking divisions, McMillan noted.
Finance jobs are among the most prone to displacement by AI, according to a recent Citigroup report. AI adoption could boost the industry’s profit by $170 billion by 2028, Citigroup said.
While the process is still in its infancy, McMillan acknowledged that business models will likely change in ways that are hard to predict.
“I think that there will be disruption in some areas,” he said. “We look back on all the things that we think we’re going to lose, but we don’t see what’s ahead.”
What’s ahead is the need for millions of prompt engineers to train AI to create the desired outcomes for companies, McMillan said; it took Morgan Stanley months to fine-tune prompts for Debrief, he noted.
McMillan said he even told his teenage children to consider careers as prompt engineers.
“They’re going to learn how to talk to machines, and tell those machines what to do, and engage with people and collaborate,” he said. “It’s a whole different game than how we’ve been doing work.” More