JPMorgan Loss Shows Portfolio Hedging Vulnerability
Federal banking regulators crafting language for the Volcker Rule in October 2011 asked themselves in a consultation document whether allowing hedging exemptions for commercial banks can “create the potential for abuse.” At the time they couldn’t have anticipated that JPMorgan would provide a case study on the subject six months later.
To see how JPMorgan saw the world before announcing the $2 billion loss on May 10, go back to the bank’s first quarter earnings call on April 13. JPMorgan chief financial officer Doug Braunstein explained how the bank’s Chief Investment Office strategy worked. The bank had a $360 billion excess of deposits over loans, and needed to hedge the interest rate mismatch between the short-maturity deposits and long-maturity loans.