Richard Sharp, a member of the Bank of England's FinancialPolicy Committee (FPC), said the so-called London Whale losses atJPMorgan Chase & Co. illustrate the financial-stability risksposed by firms “too big to manage.”

JPMorgan's report on the losses is “very chilling” in revealinghow information “can get distorted” as it passes through managementlayers, Sharp said in a parliamentary testimony today in London.Money laundering in places such as Mexico at HSBC Holdings Plc androgue trading at UBS AG are among other examples, he said.

“Risks aren't understood where they need to be understood withinthe organization,” Sharp said. “That obviously begs a question howthe regulator can be on top of that if even the organization itselfcan't be on top of that risk?”

Sharp discussed the banks as he explained to lawmakers hisconcerns on operational risks to financial stability. He was one ofthree newly appointed FPC officials appearing in pre-appointmenthearings before they take up their role on the panel charged withusing macroprudential tools to address broad threats to thefinancial system.

When asked about his concerns on governance at banks, he saidnon-executive members of banks' risk committees may lack theability to assess large pools of financial instruments. The FPC'snext meeting is on June 18 and the semi-annual Financial StabilityReport will be published June 26.

“I worry that the auditors are ill-equipped,” Sharp said. “TheJPMorgan experience indicates that even the executives wereill-equipped to see what was in a multi-trillion dollarportfolio.”

Leverage Ratio

Sharp, who used to work at Goldman Sachs Group Inc., said risksposed by these large financial institutions support the case forofficials to be given a tool to adjust banks' leverage ratios, ameasure of their debt-to-equity level.

“The simplicity of leverage is one of the most important tools”when firms are conducting “highly complex” transactions, Sharpsaid. “Simple leverage and capital protection needs to be in placeto protect the nations within which they operate, the taxpayers ofthose nations, and the interests of the shareholders.”

The Basel Committee on Banking Supervision said in March thatthe biggest banks had an average leverage ratio of 3.8 percentversus a target of 3 percent ratio for banks' equity-to-debt. Themeasure is designed to be a backstop to capital requirements,helping to contain excessive indebtedness.

Sharp's remarks followed lawmakers' questioning of Clara Furse,former chief executive officer of the London Stock Exchange. Sharpsaid the FPC's toolkit should include leverage ratios, though heagreed with Furse that it's not “absolutely required now.”

Furse argued that leverage wasn't now an “urgent requirement”for the FPC. She drew fire from lawmaker Jesse Norman, who said herviews meant he “will be thinking very seriously about whether I canpossibly support this nomination.”

Martin Taylor, a member of the Independent Commission on Bankingand a former adviser at Goldman, said during his testimony that theFPC's “frighteningly wide field of focus” gave it scope to makerecommendations on leverage.

“We may be able to be influential on leverage without possessingthe formal tool,” he said. “I do agree that the best thing is tohave tools which one doesn't need to use because one has them.”

Taylor will “urge the Treasury to be sterner” about grossleverage in the financial system, he said, adding that he agreedwith Sharp that a subdued banking industry may be more amenable tothe imposition of constraints.

“The time to do this is when balance sheets are relativelyrestrained,” he said. “It's easier to put a cap on when the capisn't too tight.”

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