Federal Reserve Chairman Ben S. Bernanke said the Volcker Rule may have been able to influence the outcome of JPMorgan Chase & Co.’s $2 billion trading loss.
Bernanke said documentation of a trade’s rationale, an auditing process, governance rules and compensation limits that are part of the proposed Volcker Rule may have played a role in changing the result at the largest U.S. bank. The legislation aims to limit proprietary trading while allowing exemptions for market-making and hedging.
One relevant feature of the rule “would have been the control of governance aspects,” Bernanke said today at a news conference. “That might have potentially changed the outcome.”
Five banking regulators, including the Fed and the Treasury Department’s Office of the Comptroller of the Currency, are finalizing the Volcker Rule. Regulators have struggled with whether JPMorgan’s trade would have been allowed under the proposal’s exemption for portfolio trading.
JPMorgan has been under tougher regulatory scrutiny since Chief Executive Officer Jamie Dimon said May 10 that the firm’s chief investment office suffered the loss. He later called it “a Risk 101 mistake.” Regulator probes began after traders in the London office, which manages the bank’s excess cash, made wrong-way bets on illiquid credit derivatives.
The Fed, as the regulator of bank holding companies, is helping oversee JPMorgan’s efforts to manage and eliminate risk from its portfolio. The Fed is looking at other parts of the bank’s holding company to determine if governance, risk management and control weaknesses are present elsewhere, Federal Reserve Governor Daniel Tarullo said in a June 6 Senate Banking Committee testimony.
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