JPMorgan Chase And Risk Management: Where Do We Go From Here?

Author:Mr Jeffrey Curry
Profession:FTI Consulting

"JPMorgan Loses $2 billion-$3 billion from Trading Activities"—This is the newest in a string of high-profile headlines describing significant trading losses at major financial institutions. And, the losses at JP Morgan Chase (JPMC) are increasing as we speak, and may top $7 billion.1 As with the others, this most recent big-bank loss call into question the notion that the large banks have strengthened their risk management capabilities in the post-Great Recession world. JPMC was supposed to be the best of the best. This venerable institution with its "fortress balance sheet," the darling of the regulators2 was supposed to somehow have immunized itself from this kind of risk. At least that is what many thought, as the behemoth bank had successfully navigated through the Great Recession. But that clearly is not the case, as it wasn't in the other cases that experienced massive losses from trading activities, as shown in Figure 1.

Figure 1 includes the big, headline-grabbing losses that have happened in the last 20 years. This list does not include the hundreds of smaller, but still significant, losses that occurred on numerous trading strategies gone wrong or on other unauthorized or rogue trading activity. The list also excludes losses from trading activities at many large non-public hedge funds and other investment funds, in which such losses are not publicly reported. In addition, the list does not include the massive losses from even more significant portfolio management decisions to increase (or not to limit or decrease) concentrations in high-risk activities. Examples of the latter risks or losses include originations or purchases of subprime mortgages (pre-crisis), even as the U.S. housing market was in a state of decline, and concentrations in commercial real estate in weak markets. The collapse of Lehman and Bear Stearns falls into the last category.

These losses weaken our financial institutions and heighten the call for more intensive regulation. For example, the Volcker Rule, a new rule named after a former Federal Reserve chairman and part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), will significantly limit U.S. banks from making certain kinds of speculative investments that do not benefit customers.4 The Volcker Rule is highly controversial and very complex. The proposed rule is nearly 300 pages in length, and it seeks comment from the industry on hundreds of questions that would affect its promulgation and implementation, virtually ensuring that the final rule will be even more lengthy and complicated.

These risks and losses, and the often ill-advised and poorly structured regulations that are promulgated to try to limit risks and losses...

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