JPMorgan Chase & Co.’s trading loss of more than $2 billion points to failures in the bank’s risk management practices, U.S. regulators will tell lawmakers today.
Thomas J. Curry, the Comptroller of the Currency, said the losses raise “questions about the adequacy and rigor” of the bank’s risk operation. Curry said his agency, JPMorgan’s primary regulator, is in the midst of a broad review of the bank’s management systems in the wake of the May 10 disclosure of the losses from its chief investment office.
“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 before the Senate Banking Committee 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.
Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment on the prepared remarks.
Dimon, who also will testify in front of the House Financial Services Committee on June 19, is under pressure from lawmakers and regulators to explain the losses and the strategy behind them, which he has called “flawed, complex, poorly reviewed, poorly executed and poorly monitored.”
“I expect a lot of pressure on regulators on why they didn’t see this coming,” said Joe Engelhard, senior vice president of Washington-based investment advisory firm Capital Alpha Partners LLC. “I expect a lot of Monday morning quarterbacking.”
Fed Governor Daniel Tarullo said in his prepared testimony that the central bank has been assisting in the oversight of JPMorgan’s “efforts to manage and de-risk the portfolio in question.”
Tarullo, who pointed to the importance of “robust bank capital requirements,” said the Fed, as the primary regulator for JPMorgan’s holding company, has been looking to see if there are weaknesses in risk management or control. He said the Fed has not found similar risks, though the review is “not yet complete.”
Curry, who was confirmed by the Senate as head of the agency in March, will face Democrats skeptical of the OCC’s oversight of the New York-based bank and critical of its role in drafting a ban on proprietary trading.
“Over the past two years the OCC has been very unhelpful and hopefully that will now change,” Senator Jeff Merkley, an Oregon Democrat and co-author of the so-called Volcker rule, said in an interview.
The OCC is “not drawing any conclusions” about whether the trading that led to the losses would have violated the Volcker rule, Curry said. The rule, part of the Dodd-Frank Act, would ban proprietary trading by banks that benefit from FDIC deposit insurance and Fed borrowing. Congressional Democrats and consumer groups say JPMorgan’s trading losses show the need for the tougher restrictions.
“It’s premature to reach any conclusion based upon the facts and information as they currently exist,” Curry said.
The final version of the Volcker rule, which is still being revised, should prohibit 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 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, Wolin said.
Senator Sherrod Brown, who asked Curry to respond to questions about the JPMorgan losses in a June 1 letter, said he is concerned about the regulator’s relationship with Wall Street, something he has criticized the OCC about in the past.
When it comes to Curry, “I want to see him prove that that’s not going to be the case from here on out,” Brown, an Ohio Democrat, said in an interview.
One issue raised by Brown in his letter is the agency’s oversight of how JPMorgan measured its “value at risk,” or VaR. Dimon, in the May 10 call with investors, said the chief investment office used a new model that later proved to be “inadequate.”
SEC Chairman Mary Schapiro said in congressional testimony last month that the agency is “very focused” on determining whether JPMorgan appropriately disclosed changes it made during the first quarter to the VaR calculation. A company’s VaR is a measure of how much the company estimates it could lose on trading on 95 percent of days.
Curry said his agency’s review includes assessments of risk measurements “including models, limits, stress scenarios, and changes to those tools during the period in question.”