JPMorgan's 'London Whale' Loss Will Not Hit Bank's Solvency, Says OCC Head

JP Morgan's $2bn 'London Whale' loss will not create a solvency issue for the investment bank or threaten the broader financial system, according to the Office of the Comptroller of the Currency's (OCC) Thomas Curry.

During CEO Jamie Dimon's second testimony this month, Curry says the bank has significant capital reserves and liquidity to deal with the loss but the event will reignite questions from regulators on Volcker Rule details and how risk management within banks could be better supervised and governed.

Dimon has previously said that Dimon also would not elaborate on holdings that caused the losses beyond the $2bn already disclosed, though he did say that the Chief Investment Office (CIO) has $7bn in unrealised gains that may be used to offset the damage.

Dimon is testifying in front before the House Financial Services Committee, after firstly testifying in front of the US Senate Banking Committee last week, after the US launched a Federal investigation into how the group's CIO lost $2bn in bad bets.

Dimon is claiming that "a series of events led to the difficulties in the synthetic credit portfolio," managed by the CIO, which includes "CIO's traders did not have the requisite understanding of the risks they took."

In May, Bruno Iksil, nicknamed the "London Whale" for his rumoured preference for large trades, and his colleagues at the London unit of JPMorgan's CIO are said to have lost around $2bn through bad bets in a portfolio that was specifically designed to hedge the bank's risk exposure.

This prompted an investigation by several US authorities and Dimon will now have to explain why he didn't ensure that the CIO's risk managers adequately keep pace with the nature of the unit's business.

In his prepared testimony before US lawmakers, Dimon said the portfolio "... morphed into something that, rather than protect the firm, created new and potentially larger risks. We have let a lot of people down, and we are sorry for it."

Designed to give banks a single, simple figure of their total risk exposure, Value-at-Risk models of risk management, known in the industry as VaR, are being challenged by many experts who say too many banks rely on what's become an out-dated, misunderstood and poorly-used method of calculation in a financial market universe that has fundamentally changed since the collapse of Lehman Brothers in 2008.

"A fundamental problem with the use of VaR, and other quantitative models, in my opinion, is misunderstanding and misuse," says Shannon Burchett, managing director of Risk Limited and one of the most respected figures on the subject. "One of the only positive things I suppose can be said about shocking losses occurring when people have been somewhat comfortably relying on VaR as a sure indicator of expected maximum risk exposures, is that market confidence has now been shaken and risks measurements and risk controls are going to be reassessed."

Click here to watch the live US Senate hearing