WASHINGTON — Federal Reserve Board Chairman Ben Bernanke suggested Wednesday that a proposal to ban banks from proprietary trading could have helped prevent the $2 billion loss at JPMorgan Chase & Co.
Bernanke, speaking to reporters at a press conference following a two-day Federal Open Market Committee meeting, said one aspect of the so-called Volcker rule "might have potentially changed the outcome" at the New York bank, given the number of improved controls and governance policies that would have been in place to ensure compliance with the regulation.
"One aspect of our rule that I think would have been important in the context of the loss is that, in the rule, a bank would be required to provide a plan in advance explaining how the hedge was going to be done, how it was going to work," Bernanke said. It "would be necessary to have an auditing process to make sure that, in fact, that was being followed, that there were adequate risk-management and governance rules to oversee the process."
The draft proposal, named after former Fed Chairman Paul Volcker and designed to ban banks from engaging in proprietary trading and hedging activities, has garnered even more attention following the losses at JPMorgan. Lawmakers have grilled both regulators and Jamie Dimon, the bank's chairman and CEO, on the issue and whether Volcker would have prevented the trades.
Sen. Jeff Merkley, who co-authored the provision in the Dodd-Frank law, has argued that the JPMorgan trades should not have been allowed under the rule's ban on proprietary trading.
Bernanke said that at least one "silver lining" from the headline-grabbing episode is that it may prove a teaching point for regulators still trying to finalize the rule.
"Maybe there are some things we can learn in terms of writing the rule and thinking about how it would work," Bernanke said.
The chairman's remarks echoed earlier comments by Fed Gov. Daniel Tarullo, who suggested if the Volcker rule had been in place, there would have been certain steps that JPMorgan, or any institution, would have taken, which might have thrown up a few red flags over a suspicious trade.
At a Senate banking hearing earlier this month, Tarullo said that had the hedging exception been invoked, JPMorgan would have been required to document it, a step he suspect didn't happen this time.
"If a firm said, 'We're doing this because it's a hedge,' they would be required to explain — to themselves, importantly, as well as to the primary supervisor — what the hedging strategy was, how it was reasonably correlated with the positions that they were hedging, and how they would make sure that they didn't give rise to these new kinds of exposures," said Tarullo."That's the reason why in the proposed regulation there is an elaboration of both some substantive guidelines, but also some risk management documents."
Speaking on Wednesday, Bernanke also cited additional safeguards the rule would put in place to prevent executives from taking risky bets in order to boost their compensation.
"It would be necessary that compensation for the executives involved in the management of the position would not be such that it would incentivize them to take proprietary positions," said Bernanke.
Regulators have already suggested a final rule won't be ready by the statutory deadline set by Congress of July 21.
In April, regulators issued guidance specifying financial institutions would have to comply by July 21, 2014, or two years after the rule technically takes effect.
Bernanke, who first suggested regulators may be late in delivering a final rule, didn't offer any new targets on Wednesday as the Fed and other banking agencies sift through 18,000 comment letters on the draft proposal.
"It's been a very difficult process in terms of the amount of work that has to be done the amount of coordination that has to be done," said Bernanke. "I don't have a date for you."
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