US agency to look at JPMorgan's risk limitation policies
Source: Agencies |
June 7, 2012, Thursday
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Print Edition
Print Edition
STARTING late last year, JPMorgan Chase & Co reduced the amount of hedging it was doing to contain potential losses, according to a top federal regulator. That decision backfired this spring, when the bank suffered a US$2 billion-plus trading loss that has renewed calls from lawmakers and Obama administration officials for tougher regulation.
In testimony prepared for a hearing yesterday by a Senate panel, US Comptroller of the Currency Thomas Curry said his agency is examining JPMorgan's risk containment policies in the weeks before it suffered the loss.
The agency is conducting an extensive analysis of the JPMorgan loss that "will focus on where breakdowns or failures occurred," Curry said.
His agency, which is part of the Treasury Department, oversees about 2,000 banks and has had 65 examiners on site at JPMorgan's offices.
JPMorgan's CEO Jamie Dimon acknowledged the loss on May 10, weeks after dismissing concerns about the bank's trading as a "tempest in a teapot." He more recently called the loss "a black mark" for the bank.
Dimon has said the loss came from trading in credit derivatives that was designed to hedge against financial risk, not to make a profit for the bank. Dimon is due to testify at a hearing of the banking committee next Wednesday.
The misstep at JPMorgan has revived debate over the so-called Volcker Rule, which would prevent banks from trading for their own profit. The idea is to protect depositors' money, which is insured by the government. Regulators are finalizing the rule, which is set to take effect in July. But banks will have until July 2014 to meet its requirements.
The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio
Managers at JPMorgan changed the risk containment strategy and cut the amount of hedging against potential losses, Curry said. When it was used in the first quarter, trading "deviated from expectations and resulted in substantial losses in the second quarter," he said.
In testimony prepared for a hearing yesterday by a Senate panel, US Comptroller of the Currency Thomas Curry said his agency is examining JPMorgan's risk containment policies in the weeks before it suffered the loss.
The agency is conducting an extensive analysis of the JPMorgan loss that "will focus on where breakdowns or failures occurred," Curry said.
His agency, which is part of the Treasury Department, oversees about 2,000 banks and has had 65 examiners on site at JPMorgan's offices.
JPMorgan's CEO Jamie Dimon acknowledged the loss on May 10, weeks after dismissing concerns about the bank's trading as a "tempest in a teapot." He more recently called the loss "a black mark" for the bank.
Dimon has said the loss came from trading in credit derivatives that was designed to hedge against financial risk, not to make a profit for the bank. Dimon is due to testify at a hearing of the banking committee next Wednesday.
The misstep at JPMorgan has revived debate over the so-called Volcker Rule, which would prevent banks from trading for their own profit. The idea is to protect depositors' money, which is insured by the government. Regulators are finalizing the rule, which is set to take effect in July. But banks will have until July 2014 to meet its requirements.
The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio
Managers at JPMorgan changed the risk containment strategy and cut the amount of hedging against potential losses, Curry said. When it was used in the first quarter, trading "deviated from expectations and resulted in substantial losses in the second quarter," he said.
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