JPMorgan Chase & Co. (JPM:US)’s trading loss of more than $2 billion raises “questions about the adequacy and rigor” of the bank’s risk-management practices, according to U.S. Comptroller of the Currency Thomas J. Curry.
The OCC, JPMorgan’s prudential regulator, is “actively examining” the New York-based bank, which disclosed the losses from its chief investment office on May 10, Curry said in remarks prepared for a Senate Banking Committee hearing tomorrow. The agency has learned that the bank’s position “deteriorated rapidly” at the end of April and during the first days of May, he said.
“Since that time, the OCC has been meeting daily with bank management with respect to the bank’s response to this situation, to re-evaluate the risk-management activities and controls of the bank and how they applied to its CIO function, and to determine what additional action is necessary,” Curry said in his statement.
The hearing will be the first public airing of the roles played by the OCC, the Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury Department in the period before JPMorgan Chairman and Chief Executive Officer Jamie Dimon disclosed the trading losses tied to credit derivatives.
Senator Tim Johnson, the South Dakota Democrat who leads the committee, said the session will give lawmakers a chance to probe the losses at the biggest and most profitable U.S. bank. It may also provide a preview of the panel’s scheduled June 13 hearing with Dimon.
The OCC is “not drawing any conclusions” about whether the trading that led to the losses would have violated the so- called Volcker rule, which would ban proprietary trading by banks that benefit from FDIC deposit insurance and Fed borrowing. JPMorgan’s disclosure has heightened tension around the Dodd-Frank Act measure being crafted by regulators, with congressional Democrats and consumer groups saying the loss shows the need for tougher restrictions.
“It’s premature to reach any conclusion based upon the facts and information as they currently exist,” Curry said.
The final Volcker rule should prohibit activity, including hedging, that “does not reduce risks related to specific individual or aggregate positions held by a firm,” Treasury Deputy Secretary Neal Wolin said in his prepared remarks.
The JPMorgan loss goes beyond the rule named for former Fed Chairman Paul Volcker, Wolin said. It shows the need for banks’ senior managers to have effective risk models and accountability for failure, and for regulators to have clear understanding of banks’ exposures and risk-management systems, he said.
“Ultimately, the true test of reform is not whether it prevents firms from taking risks or from making mistakes, but whether our financial regulatory system is tough enough and designed well to prevent those mistakes from hurting the broader economy or costing taxpayers money,” Wolin said.
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