Jamie Dimon has criticised regulators in the wake of the banking turmoil for incentivising banks to load up on government securities and imposing flawed stress tests.

Dimon said the failure last month of Silicon Valley Bank and the Swiss government-engineered takeover of Credit Suisse risked undermining confidence in the banking industry and had prompted investors to price in a greater risk of a US recession.

In his annual shareholder letter, the JPMorgan Chase boss said rules had encouraged banks to amass large portfolios of US Treasury bonds that dropped in value as the Federal Reserve raised interest rates, leaving lenders nursing paper losses that have spooked investors.

“Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements,” he wrote in the letter, published on Tuesday.

The decision by SVB to invest its deposits in longer dated Treasuries damaged confidence in the lender and ultimately led to a bank run. 

Dimon also took aim at US stress tests, the annual exercises run by the Fed to gauge the biggest banks’ ability to withstand major economic shocks. He said the exercise had become “an enormous, mind-numbingly complex task about crossing t’s and dotting i’s” that might give risk committees a false sense of security.

“Even worse, the stress testing based on the scenario devised by the Federal Reserve Board . . . never incorporated interest rates at higher levels,” he added.

“A less academic, more collaborative reflection of possible risks that a bank faces would better inform institutions and their regulators about the full landscape of potential risks,” he said.

His comments on the banking turmoil reflect the growing belief among executives that the collapse of SVB and Signature Bank, two of the largest bank failures in US history, will lead to a toughening up of regulations.

SVB was not subject to some of the Fed’s toughest supervisory measures, including regular stress tests, because it had fewer than $250bn in assets. 

Dimon urged policymakers to avoid “knee-jerk, whack-a-mole or politically motivated responses”.

“We should not aim for a regulatory regime that eliminates all failure but one that reduces the chance of failure and the odds of contagion,” wrote Dimon, who has in the past complained that regulatory requirements disincentivise banks out of some activities such as mortgage lending.

He added: “We should carefully study why this particular situation happened but not overreact.”

Dimon, 67, is one of the banking industry’s elder statesmen. He uses his annual letter to opine on topics beyond his own institution, making it one of the most widely read missives on Wall Street.

He warned that JPMorgan, the largest US bank with more than $2tn in assets, was “prepared for potentially higher interest rates, and we may have higher inflation for longer”.

Higher rates will result in pain for any borrowers who have to refinance their loans, which Dimon said could expose additional weaknesses in the US economy, including in the areas of the property market.

Dimon also touched on JPMorgan’s succession planning, a perennial debate swirling around the lender given that he has led the bank since 2006.

Dimon said the bank had “multiple successor candidates who are well known to the board and to the investor community”. In 2021, JPMorgan made a series of executive changes seen as preparing potential successors to Dimon, who has the backing from JPMorgan’s board to remain in the job for several more years.