This is the most important piece of news you will read today regarding the economy.

So let's unpack it a bit.

The bank set aside just $611 million for potential future loan losses, compared with $10.47 billion in the previous quarter https://www.wsj.com/articles/jpmorgan-profit-rises-4-a-surprising-show-of-coronavirus-resilience-11602587398 via @WSJ

First, nice article, wrong title.

The title should be: "thanks to regulatory efforts over the past 10 years, major US banks can now withstand credit losses in a major recession without begging for taxpayer money"

Subtitle should be: "thanks to relief package, default rates on loans to businesses and consumers have not skyrocketed. But more support is needed to avoid a double dip this winter"

Tier 1 at JPM is around $200b. Wells, Citi and BofA are in the $130-$150b range. So if they take $15b hit, that's just 10% of their capital.

Thanks to these buffers, we can let capitalism do its job, allocate losses to shareholders as needed, and not waste time on bailouts.

Citi's stock price is about 1/2 of its value in January. That's interesting because many analysts were skeptical of the possibility of large banks losing 1/2 their value without there being a massive systemic crisis.

I had the chance to discuss a nice paper by @NatashaRSarin and @LarrySummers at Brookings a few years ago, that made the point that equity prices did not support the optimistic view that banks were in fact much safer.

Essentially, with more tier 1 equity in the books, you would expect more equity value and lower volatility. But we did not see these effects in the data to the extend we would have expected.

In the discussion Larry said stress tests might create a false sense of safety. He asked rhetorically: "Suppose all large banks were to lose 1/2 their value. According to the stress tests they would be fine. But I think if that happened we would probably have a crisis."

My answer was that in times of stress, equity market values reflect high risk premia, perhaps excessive risk premia. Tier 1 capital, on the other hand, can still be used to cover losses, and, more importantly, protect the Fed if and when it decides to be a LOLR.

Well, COVID has given us this experiment (almost, banks have lost a bit less of 1/2 their values), and the news is good. There is no systemic crisis.

My interpretation is that given the significant buffers that banks were forced to build post 2009 investors are not too worried.

They expect shareholders to bear the losses, but in a controlled way. They know that the Fed could, if needed, lend to these banks without taking on credit risk.

More importantly, they do NOT expect a credit crunch because the banks are still well capitalized.

We do not have to fight a financial fire at the same time as a pandemic. That is real progress. So, for once, can we just thank bank regulators (not just in the US)?

On the other hand, we have no excuse not to provide more relief to the people and businesses that are struggling.

Regulatory efforts over the past 10 years have given us a "financial peace dividend", the fact that we do not have to bail out the banks.

Let's use it to help workers and businesses.