Chase's Loss Splits Community Banks on Fallout

Some community bank CEOs view JPMorgan Chase's (JPM) $2 billion trading loss as a chance to make hay from public distaste for megabanks. Others see the gaffe as a rallying cry, as banks sustain yet another black eye.

The snafu has reportedly triggered probes by U.S. and U.K. regulators. That could allow smaller banks to steal some clients, says William Moss, the president and chief executive of $685 million-asset Community Partners Bancorp (CPBC) in Middletown, N.J.

"It's not going to sink Chase, but …now they'll be totally distracted with regulatory oversight and congressional hearings, and they're going to take their eye off the ball," Moss says. "Without a doubt, community banks can capitalize on this."

It also provides community banks with another chance to make the case that their business model is far less risky and should be treated differently by regulators, Moss says. "We don't take any inordinate risks, and we're not involved in complex business lines such that one transaction can put us into financial turmoil," he says.

The trading loss could reinforce the mindset of some in Washington that the big banks should be broken up, says Rusty Cloutier, the president and chief executive of MidSouth Bancorp (MSL) in Lafayette, La. JPMorgan Chase executives must "realize they don't have a clue as to how much risk they have on the books," he says.

"It's not that anybody there are bad people," Cloutier adds. "It's just too big. You can't figure it out."

JPMorgan Chase appeared to be engaged in the type of "balance sheet hedging" that regulators "encourage all banks to do," says Gerald Lipkin, chairman, president and CEO of Valley National Bancorp (VLY) in Wayne, N.J.

Lipkin says JPMorgan Chase should have better risk management procedures given the complex nature of its trading activities. "When you take on a derivative to offset a potential risk, you have to be careful that the derivative you put on doesn't create additional risks," he says. "The risk you're taking on truly has to be able to mitigate other risks."

JPMorgan Chase's wounds may be self-inflicted, but all banks could suffer collateral damage, says John Corbett, the president and chief executive of $2.1 billion-asset CenterState Bank of Florida (CSFL) in Winter Haven.

"This is riling people up that banks are bad and that banks are greedy and poor managers of risk," he says. "We've had pretty lousy reputational risk the last three years and this doesn't help."

JPMorgan Chase found some backers among its smallest brethren. Several bankers note that the $2 billion loss, while huge, is not that significant in relation to the company's total operations.

"The thing everybody has to keep in mind, is that this company makes $16 billion to $18 billion a year in profits," Lipkin says. "So what if they lost [a small fraction] of their profits?"

The loss, as a percent of its total net income, is fairly insignificant to the company and would not generate this kind of fire storm if sustained by a community bank, says Frank Sorrentino, the chairman and chief executive at North Jersey Community Bank in Englewood Cliffs, N.J.

The hit is unlikely to create a net loss for JPMorgan Chase in the second quarter, Sorrentino says. If North Jersey Community Bank had taken a similar hit, relative to its size, "nobody would care," he says. "The market reacted, JPMorgan Chase lost $15 billion in market capitalization and shareholders took it on the chin," he adds. "That's what should happen."

The mistake should not be an excuse for more oversight, but instead proves that the regulations put in place by the Dodd-Frank Act are working, Sorrentino says.

"If Chase made a trade that threatened the existence of the organization and Chase was found to be technically bankrupt, the [Federal Deposit Insurance Corp.] would step in, wipe out the shareholders … sell off the profitable parts of the business and protect the depositors," Sorrentino says. "We certainly haven't seen that occur yet, and this is not even close to that." The trading loss is being "portrayed like it's a loss to the taxpayers or depositors' money, and it's not," Corbett says. The public increasingly believes that banks should avoid all risks, and that is a mistake, he adds.

"In business, the intent is to take risks and you don't win all the time when you take risks," Corbett says. "The way JPMorgan [Chase] is being portrayed is that we're never supposed to make a mistake."

For reprint and licensing requests for this article, click here.
Community banking Law and regulation
MORE FROM AMERICAN BANKER