Wednesday, May 23, 2012

JP Morgan's loss highlights need to address transatlantic risks

A Telegraph article focused on how risk taken in the London subsidiary of JP Morgan hurt the parent company in the US.

The London subsidiary is overseen by the Financial Services Authority while the parent is overseen by the Federal Reserve.  As a result, regulators think in terms of improving cross-border regulation to assure this doesn't happen again.

Regular readers know that the best cross-border regulation is the requirement that banks provide ultra transparency and disclose on an on-going basis all of their current asset, liability and off-balance sheet exposure details.

It is only when all the exposure details are disclosed that market participants can independently assess the risk of each bank and adjust their exposure to reflect this assessment.

The JP Morgan trade shows why all exposures, regardless of where in the world a financial institution holds them, must be disclosed.  If ultra transparency only applied to the US holdings, then market participants would have been blind to the risk being taken in the London subsidiary.

Gary Gensler, the head of the Commodities Futures Trading Commission (CFTC), told Congress on Tuesday that the losses are a reminder that authorities on both sides of the Atlantic need to improve cross-border regulation. 
The trades behind the losses were linked to the London division of the chief investment office (CIO), a part of JP Morgan that is tasked with investing the more than $300bn (£190bn) of deposits the bank has yet to lend out.... 
"It's a good reminder that risks in London can come back here and we can't have the US taxpayer standing behind them," Mr Gensler told the Senate Banking Committee.
However, we do want investors in JP Morgan and other financial institutions to be exerting market discipline so that the risks taken by financial institutions are restrained on a global basis.

Ultra transparency on a global basis is needed if the markets are going to provide this type of discipline.
The losses that JP Morgan disclosed almost two weeks ago shocked Wall Street and have reignited the debate about how best to regulate the world's largest banks. 
The London division of JP Morgan's CIO is regulated from the US by the Office of the Comptroller of the Currency, while JP Morgan's investment banking business in London is regulated by the Financial Services Authority.
The best form of regulation is market discipline.  This is something that can only occur when market participants have access to all the useful, relevant information in an appropriate, timely manner.

Only ultra transparency on a global basis provides all market participants with the useful, relevant information they need in an appropriate, timely manner.

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