US lawmakers and regulators have attacked London as a source of financial crises and promised tougher crossborder rules in the wake of $2 billion of trading losses at the UK unit of JPMorgan Chase.
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JP Morgan London Offices
Gary Gensler, chairman of the Commodity Futures Trading Commission, said on Tuesday at a congressional hearing into JPMorgan’s trading losses that the US was vulnerable to risky activity in London.
He said AIGhad been hit by its financial products unit in London while Citigroup had been harmed by special purpose investment vehicles set up in the UK capital.
“So often it comes right back here, crashing to our shores ... if the American taxpayer bails out JPMorgan, they’d be bailing out that London entity as well,” he told the House financial services committee.
One of JPMorgan’s top lobbying goals is preventing the bank’s London derivatives operations being regulated by the US’s CFTC. The bank has argued that it will lose business to the likes of Barclays and Deutsche Bank if it is forced to follow tougher US rules that require it to demand collateral from clients.
Mr Gensler said he had “a different view” and hoped that rules due out this week would not “create another London loophole”.
In the years preceding the financial crisis, Congress came under pressure to emulate the UK Financial Services Authority’s “light-touch” regime amid fears that Wall Street would relocate more activity to the UK. Now there is a growing desire to deal with regulatory gaps by crossborder regulation.
Carolyn Maloney, a Democratic representative from New York, said there was a “disturbing pattern in the last few years of London literally becoming the center of financial trading disasters."
London has railed against the raft of recent regulations from the European Union and theUK government as it fights to maintain its reputation as a global financial hub.
Regulators in the UK, however, have scrapped the light-touch approach, favoring more intrusive supervision. They are deeply concerned about the pattern of overseas firms getting into trouble in London. JPMorgan’s London-based trading unit was part of its UK branch, regulated by US officials.
The FSA sees clear flaws in the current regulatory set up for the London arms of giant US and Swiss banks, which run large parts of their UK businesses as “branches” rather than locally authorized “subsidiaries”, which would be more tightly supervised by the UK.
Hector Sants, chief executive of the FSA, told the Financial Times this week, “What is deeply unsatisfactory is that we have very little prudential oversight of a branch.”
Mr Sants, who steps down at the end of the month, said that when the UK revamps its regulatory structure next year, it “has to be clear and public about its reliance on overseas regulators or it should consider [forcing] subsidiarization .”
Senior JPMorgan executives are also reviewing whether it was right to base the unit in London, at a distance from the bank’s New York headquarters.
Meanwhile, Thomas Curry, head of the Office of the Comptroller of the Currency, the US regulator responsible for overseeing JPMorgan’s UK branch, said on Tuesday that his agency would “use our experience here in our review of JPMorgan Chase to re-evaluate the numbers and strength of the personnel in our London office”.
“It just goes to show that faith in massive regulatory bureaucracies and excessive regulation is misplaced,” said Senator Richard Shelby, the senior Republican on the Senate banking committee.