FIIG - The Fixed Income Experts

News and Education

$1bn in fines for JPMorgan - material but manageable

by William Arnold | Sep 24, 2013

JPMorgan Chase & Co will pay US$920m in fines and has agreed to admit that it failed to oversee trading that led to a US$6bn loss. US and UK regulators said that weak oversight allowed traders in its London office to assign inflated values to transactions and cover up huge losses as they ballooned. Two of the traders are facing criminal charges of falsifying records to hide the losses.

Despite the headline-grabbing nature of the fines, they are very manageable for the largest US bank, in the context of its earnings power in the order of US$20bn annually.

The eyebrow-raising size of the fines and the harsh language used in the settlements send a strong message to JPMorgan management and the management of other complex systemically important banks. In announcing its settlement, the UK Financial Conduct Authority said that “JPMorgan’s conduct demonstrated flaws permeating all levels of the firm” and that “this is yet another example of a firm failing to get a proper grip on the risk its business poses to the markets.”

Although the regulatory settlements represent a step forward in closing the 2012 trading loss incident there will continue to be ramifications for JPMorgan and the broader banking industry.  The settlement suggests an aggressive regulatory approach to large complex firms that pose systemic risks to the broader economy. Recent press reports have indicated that JPMorgan is spending aggressively (some US$4bn) to beef up its compliance and controls on an enterprise-wide basis.  It is likely regulators will push other big banks to also strengthen operational risk management and in turn increase the cost of doing business.

Fines were expected to be handed down and CDS markets reacted little to the news on the day.