Will “too big to manage” banks be broken up?

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The announcement of JPMorgan’s trading loss of more than $2 billion has renewed a call for more stringent oversight of Wall Street banks.     It inspired arguments that some global banks are “too big to manage.”  

Besides the U.S. regulators struggling to oversee how big banks operate, JPMorgan’s executive team also seemed to face similar challenges.    Was it really a well-intended risk management or hedging that went wrong?      Or was it a case of big bank overestimating itself without understanding the threats posed by its own belief?

Two years after the Dodd-Frank Act was passed, many of those changes are yet to be implemented.    This includes the Volcker Rule that would restrict big banks from proprietary trading.   And it would limit big banks from investing in private-equity and hedge funds.

JPMorgan’s $2 billion trading loss seems to be a stark reminder for necessity of Volcker Rule.     However, will this part of the financial regulatory overhaul be effective?   It’s hard to tell.

Banks claim that the Volcker Rule will disrupt two of their primary functions:   1) ability to create a market for customers interested in buying financial products and 2) ability to practice better risk management with the hope of preventing major losses.   Others believe that this rule is unworkable simply because it is hard to tell the difference between a hedging strategy and proprietary trading.    This might be the case with JPMorgan.  

On the other hand, regulators argue if the Volcker Rule had been implemented big banks were to be controlled more tightly and they would not be able to make risky bets with their own money.    And thus, would have prevented JPMorgan’s trading loss.  

Most would probably agree that higher capital requirements for banks and lower risk levels, they have an overall lower funding.    Perhaps, it would allow management to better focus on risk management.   

Even so, should big banks be broken up?     Are they really too big to manage?

Although, the Dodd-Frank Act threatens to shut down financial companies posing a risk to the system, many argue that it is near impossible to determine what size banks have to be in order to be considered as too big to fail.    Will JPMorgan’s trading loss play a role in regulators breaking up banks in the near future?    Most likely not.

 

Anna Timone (195 Posts)


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