Courtesy of Pam Martens
JPMorgan Chase is not a bank that federal regulators can simply put on autopilot and hope for the best. When the U.S. Senate’s Permanent Subcommittee on Investigations conducted a formal probe into how the bank lost $6.2 billion of its federally-insured bank’s deposits by gambling in derivatives in London in 2012, the Chair of the subcommittee, former Senator Carl Levin, said that the bank had “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.” Over the past five years, the bank has admitted to three criminal felony charges brought by the U.S. Department of Justice and is currently under an ongoing criminal probe by federal prosecutors over charges that its traders ran an eight-year criminal enterprise out of its precious metals trading desk in New York.
But it seems that the Federal Reserve, the regulator of the largest bank holding companies in the U.S., which include JPMorgan Chase, is letting JPMorgan Chase call the shots on the amount of cash reserves it has to hold at the Fed in order to remain viable during a financial panic.
Since 2015, large U.S. banks have been required by regulators to meet a Liquidity Coverage Ratio (LCR) by holding a specified amount of “high-quality liquid assets” (HQLA) that would be adequate to meet cash outflows over a 30-day period of market stress. The idea is to prevent a repeat of the implosion of Wall Street banks that occurred in 2008 when the Federal Reserve had to step in and effectively bail out most of the big banks on Wall Street and their foreign derivatives counterparties to prevent a complete collapse of the U.S. financial system.
A study published this year by the Federal Reserve Bank of St. Louis Review showed that through the third quarter of 2017, JPMorgan Chase had been meeting its Liquidity Coverage Ratio with predominantly cash reserves held at the Federal Reserve. JPMorgan Chase, for reasons yet to be explained, has now radically changed its mix of high-quality liquid assets from a majority of cash reserves held at the Federal Reserve to 63 percent made up of securities.
According to the most recent 10-Q that JPMorgan Chase filed with the Securities and Exchange Commission, from September 30 of last year to September 30 of this year, the bank reduced its cash position that was predominantly held at Federal Reserve banks by $145 billion from $344.66 billion to $199.8 billion. During the same period, to meet its required level of High-Quality Liquid Assets (HQLA), it increased its securities holdings by $147 billion. (See chart below from the 10-Q.)
According to a note in the SEC filing, the securities that have replaced the liquid cash include “Predominantly U.S. Treasuries, U.S. GSE [government-sponsored enterprises] and U.S. government agency MBS [mortgage-backed securities], and sovereign bonds net of applicable haircuts under the LCR [Liquidity Coverage Ratio] rules.”
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