We Need Regulators Who Do Their Jobs
May 21, 2012
Publisher: The New York Times

The New York Times asks in Room for Debate, "What kind of regulation would have prevented the latest Wall Street disaster, when JPMorgan Chase lost billions of dollars?"

Calls for new regulation in the wake of more than $2 billion in losses at JPMorgan Chase may be well intentioned, but new rules aren't needed to prevent banks from excessively risky trading activities. Existing regulations will do the job - if government regulators do theirs.

Remember, banks do lose money on some activities. The goal is to offset these losses with profits on other activities. JPMorgan Chase did this - earning a profit of $5.4 billion in the first quarter. It ended the quarter with $182 billion in equity capital. It remains to be seen whether JP Morgan Chase engaged in inappropriate and excessive risk when it tried to hedge its bets, though its chief investment officer has resigned.

This has led some to call for tougher, or more, regulation. But this doesn't address the problem and diverts attention from the real issue: What did the regulators know about these trading activities, and when did they know about them?

The regulators' sole purpose is to ensure that banks operate safely and soundly. They must continuously assess the riskiness of all bank activities. If it turns out that regulators failed to identify excessively risky trading activities at JPMorgan, then how can we be sure other big banks aren't engaging in similarly risky behavior? The answers to these questions are crucial, given the dismal performance of regulators in curtailing, if not preventing, the most recent financial crisis.

The major regulatory failure of the past three decades has been a lack of enforcement of existing regulations. We do not need to hire more regulators or to pile on more regulations. We need the government watchdogs to enforce existing regulations in a timely manner to prevent excessively risky activities. Regulators have the authority to contain risk, and they should use it. The public and taxpayers deserve no less.

James R. Barth, a senior finance fellow at the Milken Institute and the Lowder eminent scholar in finance at Auburn University in Alabama, is a co-author of "Guardians of Finance: Making Regulators Work for Us."