Financial Regulation

Regulators Still Trying to Understand JPMorgan's Trading Flub


Department's Comptroller of the Currency Thomas Curry, Securities and Exchange Commission Chairman Mary Schapiro, Commodity Futures Trading Commission Chairman Gary Gensler, Federal Deposit Insurance Corporation Acting Chairman Martin Gruenberg, and Federal Reserve System Board of Governors General Counsel Scott Alvarez prepare to testify before the House Financial Services Committee on Capitol Hill June 19, 2012

Photograph by Chip Somodevilla/Getty Images

Department's Comptroller of the Currency Thomas Curry, Securities and Exchange Commission Chairman Mary Schapiro, Commodity Futures Trading Commission Chairman Gary Gensler, Federal Deposit Insurance Corporation Acting Chairman Martin Gruenberg, and Federal Reserve System Board of Governors General Counsel Scott Alvarez prepare to testify before the House Financial Services Committee on Capitol Hill June 19, 2012

Just how did regulators miss the $2 billion trading loss at JPMorgan Chase (JPM)? And how can they prevent similar losses in the future? Those were the big questions Tuesday at a House Financial Services Committee hearing.

That five panelists were called on to testify shows the web of regulators that keep an eye on banks like JPMorgan. The Office of the Comptroller of the Currency oversees national banks, while the Commodity Futures Trading Commission regulates the type of derivatives trades that caused the bank’s loss. The Federal Deposit Insurance Corporation insures customer accounts in the event of bank failures, while the Federal Reserve Board of Governors keeps an eye on risks across the banking system. Then the Securities and Exchange Commission watches disclosures that banks make to their shareholders.

Responding to a grilling, the five regulators’ defense boiled down to three main points.

We didn’t get good info from the bank. Regulators said they needed better and more detailed information to spot how JPMorgan was taking on risk. Thomas Curry, the comptroller of the currency, said, “In hindsight, if the reporting were more robust or granular, we believe we may have had an inkling of the size and potential complexity and risk of the position.” Scott Alvarez, general counsel for the Federal Reserve Board of Governors, said that since JPMorgan’s own internal reports didn’t fully capture the risk, the regulators were limited. “We have to rely on information that we get from them,” he said.

We’re looking into it now. Curry, the primary regulator over JPMorgan, says the OCC is working now to examine what actually happened with the soured trade and is monitoring the “derisking” as JPMorgan unwinds its position. He also said the OCC is checking on its own procedures to see why it didn’t spot the trade in its ongoing examination of the bank. SEC Chairman Mary Schapiro said that her agency is looking into whether JPMorgan accurately reported changes to the model it used to measure risk in its first-quarter earnings. She said if those disclosures were insufficient, JPMorgan could face penalties. 

We won’t miss it next time. Schapiro and Gensler both say that pending changes as part of Dodd-Frank financial reform will help regulators spot problems in the future. While much attention has been giving to whether the Volcker Rule would have prevented JPMorgan from making these trades, regulators pointed to lesser-known parts of Dodd-Frank with wonky names like “722(d)” and “Title VII regulatory regime” that are bringing more transparency to derivatives markets. For example, Gensler says that the CFTC will be able shrink what he called “the London loophole” in its interpretation of the 722(d) provision that gives U.S. regulators some oversight of overseas trades.

The regulators hope that when financial reform is finally implemented, they’ll have more data and powers at their disposal — so that next time, they won’t be a step behind.

Weise_190
Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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    • $57.57 USD
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