Big banks see risks in financing the AI boom, but are happy to keep writing the checks

By Tomi Kilgore

JPMorgan CEO Jamie Dimon sees reason not to chase all AI financing deals, while Wells Fargo CEO Charlie Scharf implies the AI buildout resembles the dot-com boom

From left: Wells Fargo CEO Charlie Scharf, Bank of America CEO Brian Moynihan, JPMorgan Chase CEO Jamie Dimon and Citigroup CEO Jane Fraser all chimed in on the risks of related to the massive AI buildout, but how there's still no sign that investments need to slow down.

It's one thing to know the risks of how fast the bandwagon is moving. It's another thing entirely to try to slow it down.

One key takeaway from what the biggest U.S. banks said when they reported third-quarter earnings this week is that they need artificial intelligence, not only to improve how efficiently they run their businesses, but also as a gravy train, given that they provide the financing for the massive AI buildout.

The banks also recognize there are risks to their businesses and to credit markets and the U.S. economy if the AI boom hits a speed bump. And while those risks increase if interest rates continue on their current path, most feel they remain manageable, and can be kept contained. So there's no need to step on the brakes, yet.

The banks also addressed the elephant in the room, about how AI agents that the banks are helping finance could end up eating away at their deposit business. But almost in unison, they effectively brushed the worries aside, saying competition from higher-rate-seeking money is nothing new.

Wells Fargo (WFC) CEO Charlie Scharf said he believes the worry that people will use AI agents to help them move money to higher-rate alternatives "is completely overdone," at least for the foreseeable future.

"Just a reminder, people keep money with us for a lot of reasons beyond just maximizing that last value they get in terms of savings," Scharf said, according to an AlphaSense transcript of the post-earnings call.

Given how bank stocks have been falling over the past couple of months, investors needed to hear that the risks weren't being ignored. How the stocks closed on Wednesday suggests they were left disappointed.

The State Street SPDR S&P Bank ETF (KBE) vs. the S&P 500 (SPX) since July 1.

The State Street SPDR S&P Bank ETF KBE has dropped 1.4% since the banks started reporting earnings on Tuesday, to close Wednesday at a four-month low. The ETF has dropped 12.8% since closing at a record high on Aug. 14, while the S&P 500 index SPX has slipped just 0.9%.

There are risks, but the potential reward is too great

Wells Fargo's Scharf hinted that the AI boom was similar to the dot-com bubble of the late 1990s. That bubble popped in early 2000, leading to an eight-month recession in 2001 and a three-year bear market.

The AI investment cycle has become a "complicated macroeconomic force," as it has driven demand for products from a wide range of industries, including semiconductors, power-generation equipment, cooling systems, cybersecurity software and data-center infrastructure, Scharf said, according to an AlphaSense transcript of the post-earnings call with analysts.

While that speaks to potential ripple effects if the cycle starts to turn, which Bank of America (BAC) CEO Brian Moynihan also addressed, Scharf sees no reason to try to slow things down. At least not yet.

"The scale of investment here increasingly resembles prior infrastructure booms, creating both significant opportunities, but also risks given the significant leverage used to finance the buildout and the upward pressure on prices in selected industries and supply chains," Scharf said. "Having said this, the strength of the economy and the positive forces from these investments have thus far outweighed the potential downside."

Meanwhile, JPMorgan Chase (JPM) CEO Jamie Dimon was a little more clear about the potential risks of allocating the bank's capital, when the investment bandwagon is traveling at current speeds.

He said on the earnings call that the bank is "tightening up a little bit on credit," as some of the credit terms "have gotten a little bit loose."

Some credit covenants have become "a little too weak," there's been a bit too much pump-priming of good assets - "a little too much pushing on it," Dimon said. "We just don't feel like we have to chase that kind of stuff anymore."

But perhaps Citigroup (C) CEO Jane Fraser summed up the banks' narrative on AI the best. She acknowledged that the higher-interest-rate environment has the potential to create some areas of stress - just not yet. For broader AI ecosystem, "I don't think higher rates are going to trump the imperative to invest there."

There's just not enough AI computing power to satisfy demand, Fraser said. "We need to keep an eye on sentiment and the other dynamics that are happening there, but we're not anticipating a lot of shift in behavior."

-Tomi Kilgore

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10-14-26 1823ET