WASHINGTON — House Financial Services Committee Chairman Spencer Bachus defended JPMorgan Chase (JPM) on Wednesday from criticism of its $2 billion trading loss.
"Even with this loss, I believe they're one of the most profitable financial institutions in the country, and unless the facts are diametrically different from what we've heard, there is no risk from this loss to depositors or to taxpayers," Bachus said during a House hearing. "They remain a very profitable, viable institution."
Bachus, an Alabama Republican, noted that JPMorgan Chase's net worth is $189 billion, and its pre-tax profits last year were $25 billion.
"So a $2 billion loss would represent one month of earnings," he said.
Bachus accused some fellow members of Congress — clearly a reference to Democrats — of advocating for laws that would essentially prevent businesses from losing money or taking risks.
"And no law can do that, nor should a law attempt to prohibit a company from taking risks," he said.
Bachus' comments marked a major shift in emphasis from last week, when he expressed concern that the nation's largest banks are too large to manage.
"We'll probably have a hearing on too-big-to-fail," Bachus said at a May 10 hearing just prior to CEO Jamie Dimon's announcement of his firm's losses, "which is too big to manage, and it may be too big to exist."
On Wednesday, Rep. Brad Miller, a North Carolina Democrat who is sponsoring legislation that would impose strict asset caps on banks, cited the losses at JPMorgan Chase to make a similar argument.
Miller used the unexpected losses as evidence that some large financial firms are too unwieldy for regulators and investors to understand.
"What sense does it make to create banks this big?" Miller asked a pair of regulators who were testifying. "Why do we need to combine what appear to be entirely discreet businesses all within one huge $2.3 trillion bank that will be impossible to regulate, to examine? It will be impossible for the market to discipline."
Lance Auer, the Treasury Department's deputy assistant secretary for financial institutions, responded by noting that firms designated as systemically important financial institutions will be subject to stricter capital requirements than their smaller peers.
"So it will have the effect of tilting the incentives away from becoming large simply for the sake of becoming large," Auer said.
He added: "Whether it will work or not, I think, remains to be seen."
Despite those comments, the focus of Wednesday's hearing before the House financial institutions subcommittee was not JPMorgan Chase. Rather, the panel examined draft rules that lay out the process of determining whether non-bank financial institutions will be designated as systemically important.
The draft rules, adopted in April by the Financial Stability Oversight Council, contemplate a three-stage process for determining whether a non-bank should receive that designation.
The regulators who testified said they are still reviewing comments on the draft proposal, and they hope to make their first designations of systemically important financial institutions before the end of the year.
To be designated as systemically important, a label that will trigger stricter regulatory standards, a firm will need to have at least $50 billion and satisfy certain other criteria.
The proposal, which was mandated by the Dodd-Frank Act, did not generate as much opposition Wednesday from Republican lawmakers as many other aspects of the 2010 reform law have.
But several GOP legislators questioned whether the designation of certain firms as systemically important will help end the perception in financial markets that the government considers some firms too big to fail.
Rep. Scott Garrett of New Jersey argued that designating a firm as a systemically important financial institution, or a SIFI, is really an acknowledgement that the government will not let that company go into bankruptcy.
"So let's be honest here, the entire debate about SIFI designation is nothing more than a charade," Garrett said. "It's the debate about which financial institutions are too big to fail. And we should not be debating which companies to call too big to fail, we should be debating: how do we end the taxpayer being on the hook for these institutions?"
Under questioning from Texas Rep. Jeb Hensarling, a Federal Reserve Board official acknowledged that Dodd-Frank has not ended the perception that the government will rescue certain large firms, which continue to be able to borrow for less than their smaller competitors can.
"I think the market is skeptical that the regulators will have the means and the will to use the tools, and they're waiting to see," said Michael Gibson, director of the Fed's division of banking supervision and regulation.
"Count me as part of the market," Hensarling shot back.
Earlier in the hearing, Republican Rep. Shelley Moore Capito expressed concern about whether a bank less well capitalized than JP Morgan Chase would survive a similar loss.
Capito, who chairs the financial institutions subcommittee, posed a series of questions that she would eventually like answered about the trading losses.
The questions concerned where lapses in the firm's risk controls occurred, whether regulators did an adequate job of monitoring the firm's risk, and whether other systemically important financial institutions currently hold enough capital, among other issues.
Wednesday's hearing came just hours after Bachus announced that the Financial Services Committee will hold another hearing about the policy implications of the trading loss at JPMorgan Chase. Bachus also signaled that the hearing will not be held right away.
"This will give the committee and the regulators time to gather all the facts, do our homework and then have a serious hearing on this subject," Bachus said in a written statement Tuesday.
One issue to be discussed at the hearing is what Bachus described as the need for greater coordination between U.S. and U.K. regulators. The JPMorgan Chase trades were made from the firm's London office.
Register or login for access to this item and much more
All Bank Investment Consultant content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access