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Thursday, May 17, 2012 - Page updated at 05:30 a.m.

Key Republican: JPMorgan $2B loss raises questions

By MARCY GORDON
AP Business Writer

A key House Republican says the $2 billion trading loss at JPMorgan Chase raises critical questions about how banks control their risks. But Republican lawmakers rejected calls from Democrats for stricter regulation.

Rep. Shelley Moore Capito, R-W.Va., chairman of the House Financial Services subcommittee, noted the loss during a hearing about how best to regulate banks big enough to bring down the broader financial system.

Lawmakers said a firm's character should count when regulators determine if they are "systemically important financial institutions." Such a designation would subject them to a stricter level of oversight.

The panel's hearing on a key tenet of the 2010 regulatory overhaul was scheduled well before JPMorgan revealed its trading misfire last week.

Republicans on the subcommittee denounced the overhaul's requirement for financial firms to be tagged as "systemically important." They said it really means a firm is considered "too big to fail" - the doctrine that brought taxpayer bailouts of Wall Street during the 2008 financial crisis.

"These firms will never fail," said Rep. Spencer Bachus, R-Ala., chairman of the full Financial Services Committee.

News of the surprise loss at JPMorgan, the only major bank to stay profitable during the financial crisis, has renewed calls for tougher oversight of Wall Street banks. Treasury Secretary Timothy Geithner said Tuesday that JPMorgan's loss bolsters the case for stricter rules.

But Bachus and other Republicans insisted that the overhaul law, which most Republican lawmakers had voted against, won't prevent another crisis and will drive financial business overseas.

Democrats say regulations are needed "that will essentially prevent a company from losing money or taking risk," Bachus said. "No law can do that."

Regarding JPMorgan, Bachus said that "even with this loss, I believe they're one of the most profitable institutions in the country ... There is no risk from this loss to depositors or taxpayers."

Capito said the loss raised questions such as "Where did the lapses in internal risk controls within (JPMorgan) occur? Were federal financial regulators aware of the positions JPMorgan was taking?"

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.

Some critics and lawmakers want to go beyond the law's parameters by placing limits on the amount of assets those firms can hold.

"Why not have smaller banks?" Rep. Brad Miller, D-N.C., asked the regulators at Wednesday's hearing.

Michael Gibson, director of the Feds division of banking supervision, said that because "systemically important" institutions will be required to hold bigger capital cushions against risk, they will have an incentive to avoid becoming bigger.

There is little doubt that JPMorgan will meet the criteria for earning the "systemically important" tag, which will apply to all financial institutions with assets of more than $50 billion.

The regulators say fewer than 50 firms will pass the first step of the process for being designated as systemically important, but they can't say how many will make the final cut.

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