J.P. Morgan’s Loss Raises Issue of Risk Management

EditorRisk Management

J.P. Morgan's Loss Raises Issue of Risk ManagementOn May 10, J.P. Morgan CEO Jamie Dimon said the bank had taken $2 billion in trading losses in the past six weeks and could face an additional $1 billion in second-quarter losses due to market volatility.

In several trades Dimon described as “flawed” and “poorly monitored,” concerns about increasingly large investments involving complex trades were dismissed, according to the New York Times. Dimon stated that J.P. Morgan was tripped up with its value-at-risk measure, an early-detection tool that estimates how much a bank could lose on average on a rough trading day. Ideally meant to alert banks of looming overwhelming losses, the bank deployed a new model of the value-at-risk measure that underestimated losses.

When J.P. Morgan redeployed the old model, it nearly doubled the estimated potential losses in the chief investment office where the hedges were done, according to the New York Times.

The loss comes at a critical point in risk management debate for the nation’s largest banks, as legislation seeks to institute more government regulation of where and how banks invest their funds. The “Volcker Rule” aims to restrict the ability of banks whose deposits are federally insured to trade for their own benefits.

The Volcker Rule has met serious resistance from the largest banks because it hinders a huge source of profit. Dimon and J.P. Morgan have been among the most vocal critics of the Volker rule’s increasing legislation. The occurrences at J.P. Morgan have been a huge boost for proponents of the Volcker Rule.

J.P. Morgan is in the business of mitigating and assessing risks- in their case the system of checks and balances to monitor their company risks failed to avoid a $2 billion dollar pitfall. Most companies don’t face the scale of risk that a finance giant like J.P. Morgan faces. Regardless, the better you are able to identify, analyze, and control the risks that face your business, the better prepared you will be to minimize those risks from harming your business down the road.

Risk management is essential to protect your business. Our goal at Sinclair Risk & Financial Management is not only to help our clients transfer risk, prevent losses, and to be there when losses do occur, but also to control costs. With Sinclair, you gain a partner whose experience and insight will help you manage your insurance costs and increase profitability. Contact us today for more information.