The Office of Inspector General of the Federal Reserve System identified various supervisory breakdowns at the Federal Reserve Bank of New York that caused the FRB NY not to investigate trading activities by JPMorgan Chase & Company that ultimately caused the firm to sustain over US $6 billion in losses by the end of 2012. This trading occurred in the Chief Investment Office of JPMC’s London branch—the so-called “London Whale” incident. During the relevant time, the Board of Governors of the Federal Reserve System was the lead banking regulator for JPMC. According to the Inspector General, the FRB NY had identified risks associated with the CIO’s trading activities as part of its ongoing monitoring of JPMC, and planned two limited reviews of the CIO’s activities in 2008 and 2010, as well as recommended a full-scope examination in 2009. However, said the Inspector General, the FRB NY never conducted these reviews because of “many supervisory demands and a lack of supervisory resources;” weaknesses in controls involving the supervisory planning process; and a 2011 reorganization of a supervisory team at JPMC that had “institutional knowledge” regarding the CIO on whom the FRB NY’s JPMC supervisory was unduly dependent. The FRB NY also never consulted or coordinated with another banking regulator, the Office of the Comptroller of the Currency, who had oversight over one of JPMC’s subsidiaries, regarding its JPMC CIO observations. The Inspector General noted that it could not say whether completing any of the missed examinations “would have resulted in an examination team detecting the specific control weaknesses that contributed to the CIO losses.” The Inspector General made 10 recommendations to enhance the Federal Reserve’s overall supervisory process. (Click here for more information on the London Whale incident in the article “US CFTC Files and Settles Charges against JP Morgan Chase Bank Employing Its New Anti-Manipulation Authority Related to Certain of the Bank's London Whale Trading” in the October 14 to 18 and 21, 2013 edition of Bridging the Week.)
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Federal Reserve Inspector General finds deficiencies in regulatory oversight of London Whale risks
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