Accession Number PB2012-112620
Title What is Systemic Risk. Does it Apply to Recent JP Morgan Losses.
Publication Date May 2012
Media Count 14p
Personal Author E. V. Murphy
Abstract As reported at this time, the trading losses at JP Morgan are small relative to the size of the company and relative to losses from other business activities. Reportedly, one of JP Morgans asset management units conducted hedging trades that lost money, are difficult to unwind, and are expected to lose between $2 billion and $5 billion when all is said and done. Although a $5 billion loss is much too small compared with JP Morgans consolidated assets ($2.3 trillion) to threaten the health of the firm or the broader financial system on its own, the transactions illustrate a number of sources of systemic risk that could be significant if they existed on a larger scale. Policymakers may wish to investigate the possibility that losses at one of the largest systemically important financial institutions (SIFIs) could directly threaten the financial condition of its business partners and counterparties, that revelations of business practices at one SIFI could indirectly threaten the financial health of similar firms through investors fears that the practice may be widespread, that the assumptions and techniques of modern risk management may unintentionally exacerbate losses in unanticipated environments, and that regulators may not have perfected prudential oversight techniques. This report is organized around five questions: (1) What is systemic risk. (2) What are the potential sources of systemic risk. (3) What policy options can mitigate systemic risk and do they involve risks of their own. (4) Are the recently reported trading losses at JP Morgan likely to cause a systemic event. (5) How would the Volcker Rule have affected the JP Morgan trades.
Keywords Financial crisis
Financial instruments
JP Morgan
Policymakers
Systemic risk


 
Source Agency Congressional Research Service
NTIS Subject Category 70B - Management Practice
96F - Banking & Finance
Corporate Author Congressional Research Service, Washington, DC.
Document Type Technical report
Title Note N/A
NTIS Issue Number 1221
Contract Number N/A

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