Statement of
Martin J. Gruenberg,
Acting Chairman,
Federal Deposit Insurance Corporation
On
"Examining Bank Supervision and Risk Management
In Light of JPMorgan Chase's Trading Loss"
Before the
Committee on Financial Services,
United States House of Representatives
2128 Rayburn House
Office Building
June 19, 2012
Chairman Bachus, Representative Frank and members of the Committee, thank you for
the opportunity to testify this morning on behalf of the Federal Deposit Insurance
Corporation on bank supervision and risk management as it concerns recent trading
losses at JPMorgan Chase.
The recent losses at JPMorgan Chase revealed certain risks that reside within large,
complex financial institutions. They also highlighted the significance of effective risk
controls and governance at these institutions.
The four FDIC-insured subsidiaries of JPMorgan Chase firm have nearly $2 trillion in
assets and $842 billion in domestic deposits. As the deposit insurer and backup
supervisor of JPMorgan Chase, the FDIC staff works through the primary federal
regulators, the Comptroller of the Currency and the Federal Reserve System, to obtain
information necessary to monitor the risk within the institution.
The FDIC maintains an onsite presence at the firm, which currently consists of a
permanent staff of four professionals. The FDIC staff engages in risk monitoring of the
firm through cooperation with the primary federal regulators. Following the disclosure of
JPMorgan Chase’s losses, the FDIC has added temporary staff to assist in our current
review. The team is working with the institution’s primary federal regulators to
investigate both the circumstances that led to the losses and the institution’s ongoing
efforts to manage the risks at the firm. The agencies are conducting an in-depth review
of both the risk measurement tools used by the firm and the governance and limit
structures in place within the Chief Investment Office (CIO) unit where the losses
occurred. Following this review, we will work with the primary regulators to address any
inadequate risk management practices that are identified.
Following the announcement of these losses in May, the FDIC joined the OCC and the
New York Federal Reserve Bank in daily meetings with the firm. Initially, these meetings
focused on gaining an understanding of the events leading up to the escalating losses
in the CIO synthetic credit portfolio. The FDIC has continued to participate in these daily
Martin J. Gruenberg,
Acting Chairman,
Federal Deposit Insurance Corporation
On
"Examining Bank Supervision and Risk Management
In Light of JPMorgan Chase's Trading Loss"
Before the
Committee on Financial Services,
United States House of Representatives
2128 Rayburn House
Office Building
June 19, 2012
Chairman Bachus, Representative Frank and members of the Committee, thank you for
the opportunity to testify this morning on behalf of the Federal Deposit Insurance
Corporation on bank supervision and risk management as it concerns recent trading
losses at JPMorgan Chase.
The recent losses at JPMorgan Chase revealed certain risks that reside within large,
complex financial institutions. They also highlighted the significance of effective risk
controls and governance at these institutions.
The four FDIC-insured subsidiaries of JPMorgan Chase firm have nearly $2 trillion in
assets and $842 billion in domestic deposits. As the deposit insurer and backup
supervisor of JPMorgan Chase, the FDIC staff works through the primary federal
regulators, the Comptroller of the Currency and the Federal Reserve System, to obtain
information necessary to monitor the risk within the institution.
The FDIC maintains an onsite presence at the firm, which currently consists of a
permanent staff of four professionals. The FDIC staff engages in risk monitoring of the
firm through cooperation with the primary federal regulators. Following the disclosure of
JPMorgan Chase’s losses, the FDIC has added temporary staff to assist in our current
review. The team is working with the institution’s primary federal regulators to
investigate both the circumstances that led to the losses and the institution’s ongoing
efforts to manage the risks at the firm. The agencies are conducting an in-depth review
of both the risk measurement tools used by the firm and the governance and limit
structures in place within the Chief Investment Office (CIO) unit where the losses
occurred. Following this review, we will work with the primary regulators to address any
inadequate risk management practices that are identified.
Following the announcement of these losses in May, the FDIC joined the OCC and the
New York Federal Reserve Bank in daily meetings with the firm. Initially, these meetings
focused on gaining an understanding of the events leading up to the escalating losses
in the CIO synthetic credit portfolio. The FDIC has continued to participate in these daily
meetings between the firm and its primary regulators. We are looking at the strength of
CIO’s risk management, governance and control frameworks, including the setting and
monitoring of risk limits. The FDIC is also reviewing the quality of CIO risk reporting that
has historically been made available to firm management and the regulators. Our
discussions have also focused on the quality and consistency of the models used in the
CIO as well as the approval and validation processes surrounding them. Although the
focus of this review is on the circumstances that led to the losses, the FDIC is also
working with JPMorgan Chase’s primary federal regulators to assess any other potential
gaps within the firm’s overall risk management practices.
As a general matter, and apart from the specifics of this situation, evaluating the quality
of financial institutions’ risk management practices, internal controls and governance is
an important focus of safety-and-soundness examinations conducted by the federal
banking agencies. Onsite examinations provide an opportunity for supervisors to
evaluate the quality of the loan and securities portfolios, underwriting practices, credit
review and administration, establishment of and adherence to risk limits, and other
matters pertinent to the risk profile of an institution. One important element of risk
management is that senior management and the board receives accurate and timely
information about the risks to which a firm is exposed. Timely risk-related information is
needed by institution management to support decision making and to satisfy disclosure
requirements -- and it is an important element of supervisory review.
Without speaking to the specifics of the case for which a review is underway, the recent
losses attest to the speed with which risks can materialize in a large, complex
derivatives portfolio. The recent losses also highlight that it is important for financial
regulatory agencies to have access to timely risk-related information about derivatives
and other market-sensitive exposures, to analyze the data effectively, and to regularly
share findings and observations.
Last Updated 6/19/2012
CIO’s risk management, governance and control frameworks, including the setting and
monitoring of risk limits. The FDIC is also reviewing the quality of CIO risk reporting that
has historically been made available to firm management and the regulators. Our
discussions have also focused on the quality and consistency of the models used in the
CIO as well as the approval and validation processes surrounding them. Although the
focus of this review is on the circumstances that led to the losses, the FDIC is also
working with JPMorgan Chase’s primary federal regulators to assess any other potential
gaps within the firm’s overall risk management practices.
As a general matter, and apart from the specifics of this situation, evaluating the quality
of financial institutions’ risk management practices, internal controls and governance is
an important focus of safety-and-soundness examinations conducted by the federal
banking agencies. Onsite examinations provide an opportunity for supervisors to
evaluate the quality of the loan and securities portfolios, underwriting practices, credit
review and administration, establishment of and adherence to risk limits, and other
matters pertinent to the risk profile of an institution. One important element of risk
management is that senior management and the board receives accurate and timely
information about the risks to which a firm is exposed. Timely risk-related information is
needed by institution management to support decision making and to satisfy disclosure
requirements -- and it is an important element of supervisory review.
Without speaking to the specifics of the case for which a review is underway, the recent
losses attest to the speed with which risks can materialize in a large, complex
derivatives portfolio. The recent losses also highlight that it is important for financial
regulatory agencies to have access to timely risk-related information about derivatives
and other market-sensitive exposures, to analyze the data effectively, and to regularly
share findings and observations.
Last Updated 6/19/2012