Friday, 11 May 2012

Quick post: A view on the JPM embarrassment.

JPM’s loss of capital as a result of the London Whale bad trade is a mere 0.2%. Even if it was larger, the bank is very well capitalised to stand bigger shocks. There has been no harm to clients. The real damage is simply in the reputation of the institution and a bad quarter. Many people will use this incident to press on for the implementation of the Volcker rule in the US and the ring-fencing of retail operations in the UK. However, this incident shows that good capital buffers for unexpected blows are the best precaution. If things get even worse, recovery plans and living will do the rest. Although incidents like this are undesirable and there should be controls to avoid them, we need to allow risk taking if we want progress and development. We just need to ensure that if it goes sour, third parties are protected and it hurts only the risk taker.

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