May 31, 2012

U.S. bank regulators are holding daily, high-level calls to try to understand how a seemingly low-risk unit at JPMorgan was able to amass a $2 billion trading loss, but there are no immediate plans to revamp how the nation's largest banks are supervised, according to a source familiar with the matter.

Regulators have come under scrutiny for not raising red flags earlier about the massive hedging strategy that went awry, despite having more than 100 examiners embedded at JPMorgan Chase & Co.

The source, who was not authorized to speak publicly, said lessons will be learned from the JPMorgan trading loss and there may be some changes in how regulators make sure banks have good risk-management systems in place.

But regulators believe it was not their responsibility to flag the hedging strategy as something dangerous and it is upon banks to effectively manage their own risks.

"People are going back and asking: 'Is there any way we could have seen this?' I don't know that that will yield the next great radar screen," the source said.

The source added that regulators are still trying to get to the bottom of what happened and hope to come to some conclusions in the next four to six weeks.

Top officials at the bank regulators are expected to face intense scrutiny next week when they appear before the Senate Banking Committee.

Lawmakers have already railed against regulators for supposedly being in the dark about the trades and will likely press them on whether they really have a handle on what goes on at the big banks.

The criticism echoes the conversation during the 2007-2009 financial crisis when the four federal bank regulators were blamed for not recognizing that Wall Street had dangerously ratcheted up risk and become so intertwined that the bursting of the housing bubble could bring the financial system to its knees.

After that searing experience, the regulators increased the number of examiners embedded at the biggest firms, including JPMorgan.

The Federal Reserve Bank of New York, which is the primary regulator of JPMorgan's holding company, has some 40 embeds at that bank's U.S. offices, while the Office of the Comptroller of the Currency, which regulates its banking activities, has about 70 in New York, Chicago and Delaware.

The Federal Deposit Insurance Corp has another four on-site supervisors at JPMorgan.

However, no examiners were embedded at JPMorgan's Chief Investment Office in London that executed the failed hedging strategy.

UK regulators do not dispatch full-time on-site regulators. The U.S. embeds are largely clustered on one floor in JPMorgan's midtown Manhattan office, the source familiar with the matter said.

And regulators only became aware of the trading exposure in April around the time news reports said that a UK-based trader at the bank, dubbed the "London Whale," was playing a dominant role in certain markets.

A Fed spokesman declined comment. Bryan Hubbard, a spokesman for the OCC, has said he cannot speak specifically about JPMorgan, but noted it is the OCC's responsibility to ensure that banks have effective risk management. But he added that it is not their job to approve specific risk models, loans or investments.

Hubbard did say that examiners are looking at risk-management strategies at other big banks to "validate our understanding" of inherent risks.

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