Key Republican: JPMorgan $2 billion loss raises questions
WASHINGTON - A key House Republican on Wednesday said that the $2 billion trading loss at JPMorgan Chase raises critical questions about how banks control their risks. But Republican lawmakers rejected calls from Democrats for stricter oversight of Wall Street.
Rep. Shelly Moore Capito, R-W.Va., chairman of the House Financial Services subcommittee, noted the loss during a hearing about how best to regulate banks big enough to bring down the broader financial system.
Lawmakers said a firm's character should count when regulators determine if they are "systemically important financial institutions." Such a designation would subject them to a stricter level of oversight.
The panel's hearing on a key tenet of the 2010 regulatory overhaul was scheduled well before JPMorgan revealed its trading misfire last week. But the trading loss was featured prominently at the hearing.
Rep. Spencer Bachus, R-Ala., chairman of the full committee, said he's not worried about JPMorgan's trading loss affecting depositors or taxpayers.
"Even with this loss, I believe they're one of the most profitable institutions in the country," Bachus said.
Still, Capito said the loss raises questions.
"Where did the lapses in internal risk controls within (JPMorgan) occur? Were federal financial regulators aware of the positions JPMorgan was taking?" she asked during the hearing.
Democratic lawmakers and other proponents say the trades would have violated the so-called Volcker Rule, which restricts banks from trading for their own profit. Regulators are working to finalize the rule, which was mandated under the 2010 law. It was named after former Federal Reserve Chairman Paul Volcker.
JPMorgan CEO Jamie Dimon has been among the most outspoken critics of the rule. He says the loss came from a hedging strategy that backfired, and not a bet with the bank's own money.
The banks have won an exemption in the rule that Dimon notes would allow them to make such trades if they are hedging against risk.
A number of lawmakers who opposed the exemption say it encourages the kind of risk taking that endangers the broader financial system.
Some critics and lawmakers want to go beyond the law's parameters by placing limits on the amount of assets those firms can hold.
"Why not have smaller banks?" Rep. Brad Miller, D-N.C., asked the regulators at the hearing.
Michael Gibson, director of the Federal Reserve's division of banking supervision, said that because "systemically important" institutions will be required to hold bigger capital cushions against risk, they will have an incentive to avoid becoming bigger.
The regulators say fewer than 50 firms will pass the first step of the process for being designated as systemically important, but they can't say how many will make the final cut. There is little doubt that JPMorgan will meet the criteria, which will apply to all financial institutions with assets of more than $50 billion.