Undrawn commitments refer to credit lines granted by banks that can be suddenly drawn down unless the bank chooses to stop it, either by cancelling the line or claiming the Material Adverse Clause (“MAC”) clause. In the case of JP Morgan, there is more than $1 trillion of undrawn credit lines as per the table below.
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First, readers should understand that never in the history of banking has the United States suddenly gone from maximum full employment to maximum unemployment in just 5 weeks. The issue with this is that consumers and corporate customers like the Boeing could have drawn down on their credit lines within the 1 month time frame before banks even knew what hit them.
This represents a big issue because we have a situation where the US is facing an economic depression. So, we could have and there is already evidence of mass defaults in the consumer side. For the corporate customers, or what is called as the wholesale side, the credit ratings of many firms can get downgraded, and some already have. There could also be a mass wave of defaults by corporate customers, like those in the energy sector, airline sector, REITs and of course the WeWork.
So for this reason, I am quite concerned about US banking sector, because of JP Morgan. JP Morgan’s capitalization ratio is not as “iron clad” strong as Morgan Stanley. And JP Morgan did not hedge its entire credit portfolio like what Morgan Stanley did. More to come after we finish analyzing JP Morgan’s 10K. Stay tuned.