The House Financial Services subcommittee hearing on a key tenet of the 2010 regulatory overhaul was scheduled well before the biggest U.S. bank revealed its trading misfire last week. Since then, news of the surprise losses at the only major bank to stay profitable during the 2008 financial crisis has renewed calls for stricter oversight of Wall Street banks.
Treasury Secretary Timothy Geithner said Tuesday that JPMorgan's loss bolsters the case for tougher rules. "I'm very confident that we're going to be able to make sure those come out as tough and effective as they need to be," Geithner said. "And I think this episode helps make the case, frankly." Democratic lawmakers and other proponents say the trades that led to the losses at JPMorgan 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.
Regulators will determine which of the nation's banks and financial firms are "systemically important financial institutions." They will be subjected to a stricter level of oversight and requirements for holding capital cushions against risk. Treasury and Federal Reserve officials will testify at the hearing about what it will mean for some firms to be tagged as "systemically important." There is little doubt that JPMorgan will meet those criteria.
Some critics and lawmakers want to go beyond the law's parameters by placing limits on the amount of assets those firms can hold. "The recent debacle at JPMorgan Chase reaffirms my view that the six largest banks in this country, including JPMorgan, who (together) have assets equivalent to two-thirds of our Gross Domestic Product, must be broken up," Sen. Bernie Sanders, the Vermont Independent, said last.There is also pressure to reinstate strict walls separating banking from insurance and securities business, which were removed in legislation enacted during the President Bill Clinton's administration.