JPMorgan Chase & Co.'s trading loss of more than $2 billionpoints 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 thelosses raise “questions about the adequacy and rigor” of the bank'srisk operation. Curry said his agency, JPMorgan's primaryregulator, is in the midst of a broad review of the bank'smanagement systems in the wake of the May 10 disclosure of thelosses from its chief investment office.

“Since that time, the OCC has been meeting daily with bankmanagement with respect to the bank's response to this situation,to re-evaluate the risk-management activities and controls of thebank and how they applied to its CIO function, and to determinewhat additional action is necessary,” Curry said in hisstatement.

The hearing before the Senate Banking Committee will be thefirst public airing of the roles played by the OCC, the FederalReserve, the Federal Deposit Insurance Corp. and the TreasuryDepartment in the period before JPMorgan Chairman and ChiefExecutive Officer Jamie Dimon disclosed the trading losses tied tocredit derivatives.

Senator Tim Johnson, the South Dakota Democrat who leads thecommittee, said the session will give lawmakers a chance to probethe losses at the biggest and most profitable U.S. bank. It mayalso provide a preview of the panel's scheduled June 13 hearingwith Dimon.

Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined tocomment on the prepared remarks.

Dimon, who also will testify in front of the House FinancialServices Committee on June 19, is under pressure from lawmakers andregulators to explain the losses and the strategy behind them,which he has called “flawed, complex, poorly reviewed, poorlyexecuted and poorly monitored.”

“I expect a lot of pressure on regulators on why they didn't seethis coming,” said Joe Engelhard, senior vice president ofWashington-based investment advisory firm Capital Alpha PartnersLLC. “I expect a lot of Monday morning quarterbacking.”

Fed Governor Daniel Tarullo said in his prepared testimony thatthe 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 capitalrequirements,” said the Fed, as the primary regulator forJPMorgan's holding company, has been looking to see if there areweaknesses in risk management or control. He said the Fed has notfound similar risks, though the review is “not yet complete.”

Democrats Skeptical

Curry, who was confirmed by the Senate as head of the agency inMarch, will face Democrats skeptical of the OCC's oversight of theNew York-based bank and critical of its role in drafting a ban onproprietary trading.

“Over the past two years the OCC has been very unhelpful andhopefully that will now change,” Senator Jeff Merkley, an OregonDemocrat and co-author of the so-called Volcker rule, said in aninterview.

The OCC is “not drawing any conclusions” about whether thetrading that led to the losses would have violated the Volckerrule, Curry said. The rule, part of the Dodd-Frank Act, would banproprietary trading by banks that benefit from FDIC depositinsurance and Fed borrowing. Congressional Democrats and consumergroups say JPMorgan's trading losses show the need for the tougherrestrictions.

“It's premature to reach any conclusion based upon the facts andinformation as they currently exist,” Curry said.

The final version of the Volcker rule, which is still beingrevised, should prohibit hedging that “does not reduce risksrelated to specific individual or aggregate positions held by afirm,” Treasury Deputy Secretary Neal Wolin said in his preparedremarks.

The JPMorgan loss shows the need for banks' senior managers tohave effective risk models and accountability for failure, and forregulators to have clear understanding of banks' exposures andrisk-management systems, Wolin said.

Senator Sherrod Brown, who asked Curry to respond to questionsabout the JPMorgan losses in a June 1 letter, said he is concernedabout the regulator's relationship with Wall Street, something hehas criticized the OCC about in the past.

When it comes to Curry, “I want to see him prove that that's notgoing 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'soversight of how JPMorgan measured its “value at risk,” or VaR.Dimon, in the May 10 call with investors, said the chief investmentoffice used a new model that later proved to be “inadequate.”

SEC Chairman Mary Schapiro said in congressional testimony lastmonth that the agency is “very focused” on determining whetherJPMorgan appropriately disclosed changes it made during the firstquarter to the VaR calculation. A company's VaR is a measure of howmuch the company estimates it could lose on trading on 95 percentof days.

Curry said his agency's review includes assessments of riskmeasurements “including models, limits, stress scenarios, andchanges to those tools during the period in question.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.