The Senate report into JPMorgan's 2012 losses on credit derivatives suggests new capital regulations are just making investment banking groups even more complicated to oversee. But perhaps regulatory confusion will eventually shrink 'too big to fail' banks.

The US Senate report into the fiasco of a trader in JPMorgan’s office of the chief investment officer (CIO) who racked up such large positions he was nicknamed the “London Whale” makes uncomfortable reading for investment banking executives and regulators across the board. The vast positions run by Bruno Iksil were supposedly part of a bank-wide hedging process for which the CIO was in theory responsible. But the alarming implications of the Senate report are that no-one in the bank really seemed sure what Mr Iksil was hedging, or how.

If the investments were not part of a coherent treasury or risk-management process, then they should have been classed as proprietary trading and fallen foul of the Volcker Rule ban. This episode raises serious doubts over whether Volcker will reduce systemic risk.

But if the investments were, as some of the internal JPMorgan emails reprinted in the report suggest, genuinely intended to reduce the bank’s risk-weighted assets, this is perhaps even more alarming. Clearly, these complex and illiquid positions ended up dramatically increasing rather than decreasing JPMorgan’s risks. Andrew Haldane, executive director for financial stability at the Bank of England, has already suggested post-crisis regulations are becoming so complicated they make it harder to manage and regulate risk. JPMorgan’s mishap would seem to support his view.

In a strange way, however, perhaps this maze of new regulations will eventually have the desired impact. For the executives of all “too big to fail” banks, the JPMorgan saga suggests huge balance sheets can become unmanageable, and heavy corporate bureaucracies prevent effective communication of strategic and risk management aims. If regulators make the management of bank balance sheets progressively more complicated, this will prompt banks to shrink the size of trading books, and simplify the business model. Credit derivatives, with their heavy capital requirements, would become a market dominated by fund managers hedging specific exposures or taking precise directional bets. Illiquid assets should be left to the minnows that are small enough to handle them carefully, not the whales.

Finally, a tough question for the US Federal Reserve. Just how much quantitative easing does the US economy need at a time when JPMorgan was sitting on $350bn in excess liquidity that it did not know how to deploy safely?

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