(CBS/AP) WASHINGTON - JPMorgan Chase (JPM) had weak controls in place to contain risk in its investment division that suffered a $2 billion-plus trading loss, a key federal regulator said Wednesday.
U.S. Comptroller of the Currency Thomas Curry told the Senate Banking Committee that the nation's largest bank began reducing the amount of hedging it was doing to minimize potential losses at the end of 2011. Curry's agency is examining JPMorgan's risk-containment policies in the weeks before it suffered the trading loss.
"Inadequate risk management" was the problem, said Curry, during the two-hour hearing that touched heavily on the bank's trading loss. Curry said his agency is conducting an extensive review that "will focus on where breakdowns or failures occurred."
A Federal Reserve official told the Senate panel that a draft rule that seeks to prevent banks from trading for their own profit might have flagged JPMorgan's risks earlier.
The so-called Volcker Rule would force banks to more closely monitor their trading risks and explain them to regulators, Fed Gov. Daniel Tarullo told the panel.
Under the rule, JPMorgan's bank managers would have had to explain "what the hedging strategy was ... and how they would make sure that (it) didn't give rise to new kinds of exposures" to risk, Tarullo said.
The Volcker Rule takes effect in July. But banks don't have to fully meet its requirements for another two years. The trading loss has renewed a debate over exemptions to the rule, which allow banks to trade for their own profit in some circumstances.
JPMorgan CEO Jamie Dimon is scheduled to testify before the committee next Wednesday.
Dimon has been among the most vocal critics of the Volcker Rule. The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio.
JPMorgan spokesmen declined to comment on Curry's remarks. Dimon acknowledged the loss May 10, weeks after dismissing concerns about the bank's trading as a "tempest in a teapot." He more recently called the loss "a black mark" for the bank.
Dimon has said the loss came from trading in credit derivatives that was designed to hedge against financial risk, not to make a profit for the bank. He is scheduled to testify before the panel next Wednesday.
Senators pressed Curry to explain why regulators weren't able to detect the risks that led to the loss earlier.
Did the Comptroller's Office, which had 65 examiners onsite at JPMorgan's offices, "screw up" in monitoring the bank, asked Sen. Bob Menendez, D-New Jersey.
"We're going to critically look at that question," Curry responded. "It will be a critical self-review."
The Office of the Comptroller of the Currency, which is part of the Treasury Department, oversees about 2,000 banks.