Did Bank Regulators Miss J.P. Morgan's Risky Behaviors?
The solution is not tougher regulations on banks, but stronger enforcement of existing regulations
May 18, 2012
All the controversy over the $2 billion loss at J.P. Morgan Chase is swirling around chief executive Jamie Dimon, but there are others that have largely escaped notice. These are the bank regulatory authorities. Sure, it is important to ask what the bank executives knew about the riskiness of their trading activities and when they knew it. But, more importantly, what did the Office of the Comptroller of Currency and the Federal Reserve know and when did they know it? It is their duty to be sure that banks operate safely and soundly by not engaging in excessively risky activities.
The huge loss at J.P. Morgan Chase, even if it grows to $4 billion or slightly higher, does not put a big dent in the overall financial soundness of the bank. Nor does it pose a systemic risk. Our concern should be whether this is an isolated incident. Are other banks also engaging in excessively risky activities? If the regulatory authorities were unaware of the riskiness of J.P. Morgan Chase's trading activities, can we be confident they are aware of the risks being undertaken at other big banks? I certainly have my doubts based upon their failure to take appropriate action in a timely manner to curtail the riskiness of bank activities that led to the severe financial crisis during 2007-2009.
The solution is not tougher regulations based upon the J.P. Morgan Chase loss. Instead, it is the enforcement of existing regulations. Regulators already have the authority to prevent excessively risky activities. They simply must use that authority. If regulators won't use the powers they possess, what good does it do to give them even tougher powers?