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JPMorgan’s Zubrow Says Fed Risk Rule May Hurt Markets

Barry Zubrow, head of Corporate & Regulatory Affairs of JPMorgan Chase & Co. Photographer: Andrew Harrer/Bloomberg
Barry Zubrow, head of Corporate & Regulatory Affairs of JPMorgan Chase & Co. Photographer: Andrew Harrer/Bloomberg

May 1 (Bloomberg) -- -- JPMorgan Chase & Co. said a Federal Reserve proposal to cut risk by capping a bank’s dealings with any one lender, corporation or foreign government fails to strike the “correct balance” and may harm financial markets.

The plan “could destabilize markets,” Barry Zubrow, executive vice president of corporate and regulatory affairs for JPMorgan, said yesterday in a comment letter to the central bank. The Fed is reaching “well beyond” the Dodd-Frank reform legislation with “disruptive” standards that duplicate or conflict with other rules and directives, he wrote.

Lenders including New York-based JPMorgan, the largest and most profitable U.S. bank, are resisting Fed efforts to impose tougher standards on too-big-to-fail firms whose collapse could hurt the broader economy. Fed Governor Daniel Tarullo will meet tomorrow with chief executive officers of the biggest banks including JPMorgan’s Jamie Dimon to discuss the limits and complaints about this year’s stress tests.

The proposal to limit credit exposure is designed to contain the damage if a large company, foreign government or bank should fail and threaten to take down other institutions with it. Under the rule, a firm deemed systemically important couldn’t have more than 10 percent of its counterparty risk tied to one entity. The 2010 Dodd-Frank Act proposed a 25 percent cap while giving the Fed authority to tighten the standard to ensure stability in financial markets.

Who’s Included

The limit would apply to banks considered systemically important and counterparties when each has more than $500 billion in total assets, and would count loans, derivatives and other forms of credit. Bankers including Zubrow say the Fed’s model for counterparty exposure inflates rather than decreases their risk.

The rule also would restrict the ability to execute certain risk-management or hedging transactions, he said. Zubrow foresees “additional pressure to unwind largely offsetting trades in a potentially disruptive manner -- trades that an accurate measurement methodology would not show as producing meaningful risk,” he wrote. “These methodologies produce very large misstatements -- and, in most cases, overstatements -- of the true counterparty exposure.”

JPMorgan has said the company’s chief investment office, with a $360 billion portfolio, is responsible for managing some of the firm’s risks. The unit has made bets so large that the bank probably can’t unwind them without losing money or roiling financial markets, five former executives said last month.

Financial Crisis

The Fed, in proposing the rule, said the financial crisis revealed a failure of regulators to spot concentrations in credit risk and the interconnectedness of financial firms “that contributed to a rapid escalation of the crisis.”

Concentration of risk in over-the-counter derivatives was blamed in part for the banking system’s near-collapse in 2008 by the Financial Crisis Inquiry Commission’s January 2011 report.

The panel, formed to examine the causes of the meltdown, pointed to American International Group Inc., the insurer that need a U.S. bailout to avoid bankruptcy after wrong-way bets on derivatives, and the possible failure of institutions that relied on AIG for their own solvency.

“The U.S. financial sector is now more concentrated than ever in the hands of a few very large, systemically significant institutions,” the commission concluded. “This concentration places greater responsibility on regulators for effective oversight.”

Stress Tests

As for the stress tests, Zubrow said the Fed gave bankers too little information to adequately run them and disclosed too much to the public about the results.

The central bank, which released the tests on March 13, required the nation’s largest lenders to show that they have credible plans for maintaining capital and continuing lending if there’s another severe economic slump.

Zubrow, 59, asked the Fed to share the economic models that examiners used for the tests, saying this would allow financial firms to plan capital actions more effectively. Citigroup Inc. CEO Vikram Pandit had primed shareholders for higher dividends, only to be rejected by the Fed after it reviewed the company’s capital plan.

Banks were rushed to produce their capital plans and asked the Fed for more time as the regulator’s demands overlapped with year-end financial reporting requirements and federal holidays, Zubrow said. The firms had about six weeks to test their portfolios against various hypothetical scenarios and submit capital proposals with supporting documentation, he said.

To contact the reporters on this story: Cheyenne Hopkins at; Dawn Kopecki in New York at

To contact the editors responsible for this story: Rick Green at; Christopher Wellisz at

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