A former JPMorgan Chase employee is accusing America’s largest lender of systematically misreporting key indicators that the Federal Reserve uses to determine the amount of capital reserves that banks must maintain.
According to a report by the International Consortium of Investigative Journalists (ICIJ), a former JPMorgan Chase employee-turned-whistleblower alleges the bank has understated complexity indicators to its capital reserves level since 2016.
The complexity indicators, which include the total value of the underlying assets of a bank’s derivatives, the securities available for sale and trading as well as the illiquid and hard-to-value assets, are used by the Federal Reserve to gauge the risk posed to the global financial system by the top-eight largest US lenders.
The indicators are essential in the Fed’s calculations to determine the extra capital that each of the large banks must hold over and above the minimum stipulated to provide a buffer in the event of financial shocks.
According to the ICIJ report, the issue of misreporting complexity indicators was raised within JPMorgan Chase in 2018 but the whistleblower and others were retaliated against and fired four years later. Several whistleblower complaints were also filed with the U.S. Securities and Exchange Commission (SEC) and the Federal Reserve in 2022, per the report.
Citing a source in the banking industry, the report says the Federal Reserve allowed JPMorgan Chase and other big US lenders to continue the practice that’s prohibited not just by the Fed but also globally.
The ICIJ report quotes US Senator Elizabeth Warren saying,
“Inconsistent and lax bank supervision has crashed our economy before. [Fed Chair Jerome] Powell owes the American people an explanation for allowing CEOs to manipulate their financial reports so they can pay themselves and their wealthy investors more in executive compensation and buybacks.”
JPMorgan Chase’s alleged years-long habit of misreporting its complexity indicators allowed the mega lender to expand its loan book by between $75 billion to $100 billion and in the process allegedly earned the bank as much as $2 billion in additional net income in one fiscal year, according to the ICIJ report.
In the first quarter of 2023 earnings call, JPMorgan Chase CEO Jamie Dimon acknowledged the mega lender goes to great lengths to minimize its capital reserves requirements.
Dimon said,
“We’ve got our smartest people, we’re going to figure out every angle to reduce capital requirements for JPMorgan. That’s the difference. And we’ve been doing it, but there’s securitizations, there are partnerships.”
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