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The size of JPMorgan's derivatives book reflects the preferences of counterparties and its own risk management policies. It has nothing with deposit insurance or being too big to fail.
July 1 -
Thirty-seven years ago this month, the failure of a small German bank sent shock waves through the system, costing banks from New York to Singapore some $620 million in losses.The collapse of Bankhaus Herstatt in Cologne made the front page of the June 27, 1974, issue of American Banker, which we've republished today on our 175 anniversary Flashback site. While technology has made a repeat of this particular transcontinental foreign-exchange debacle unlikely, the broader theme of contagion is as salient as ever.
June 23
WASHINGTON — Federal regulators issued guidance Tuesday calling for better counterparty risk management at banks with large derivatives books.
The new guidelines say covered companies should have systems in place to measure and limit exposure to counterparty credit risk. The guidance also discusses the role of boards and senior executives in managing counterparty risk, and the importance of an institution's reporting its counterparty exposures to the board level.
The agencies — which include the Federal Reserve Board, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency — said the guidance is not meant to supplant prior policies on counterparty risk but rather provide "further explanation and clarification" on risk management standards.
"CCR management techniques have evolved rapidly over the last decade, along with increased complexity of derivative instruments under management. Banking organizations substantially improved their risk management practices during this time; however, in some cases, implementation of sound practices has been uneven across business lines and counterparty types," the regulators said.
They added that the recent financial crisis "revealed weaknesses in CCR management at many banking organizations, such as shortcomings in the timeliness and accuracy of exposure aggregation capabilities and inadequate measurement of correlation risks.
"The crisis also highlighted deficiencies in the ability of banking organizations to monitor and manage counterparty exposure limits and concentration risks, ranging from poor selection of CCR metrics to inadequate system infrastructure," they said.
