A surprise trading loss of $2 billion at
JPMorgan Chase's London operations has added pressure on British regulators to toughen financial oversight, a possibility that sent bank shares tumbling.
JPMorgan Chase , the largest bank in the United States, said it lost $2 billion in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money.
The news caused financial stocks to slump in London. Ian Gordon, analyst at Investec Securities, said that may be based on a fear that JPMorgan's difficulty will lead to tougher regulations on banking.
Barclays, which has a large investment banking arm, was the biggest loser, shedding 2.5 percent at midday. Royal Bank of Scotland fell 1.6 percent, Lloyds Banking Group 1.5 percent and HSBC 1.3 percent.
The British government has traditionally used "light touch" regulation of banking and trading in London, traditionally one of the world's biggest financial hubs.
But since the banking crisis which began in 2008, British authorities have been reconsidering that approach. On Wednesday, the government announced that it would be legislating new regulations in the current session of Parliament, including forcing banks to insulate their retail operations from riskier investment banking.
London accounts for 46 percent of the over-the-counter derivatives market, 70 percent of eurobond turnover and 19 percent of global hedge fund assets, according to the City of London, which governs the financial district.
"The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," CEO Jamie Dimon told reporters. "There were many errors, sloppiness and bad judgment."
Deutsche Bank, Credit Suisse, Goldman Sachs and Bank of America are among more than 240 foreign banks which have offices in London, Europe's biggest financial center.
Swiss bank UBS last year reported losing $2 billion through unauthorized trades allegedly made by a junior employee in London.
Jordan Lambert, a trader at Spreadex in London, said the market reaction on Friday was understandable.
"When such shocks occur, it is wise to err on the side of caution and consider whether it is a possible tip of the iceberg scenario, especially when one contemplates the interconnectedness of the banking system," he said.
Major bank stocks fell sharply Friday after JPMorgan Chase surprised investors by announcing a $2 billion trading loss.
JPMorgan's stock dropped 9 per cent in early trading, the most of the 30 stocks in the Dow Jones industrial average. Gains in technology, energy and other stocks mitigated the losses. After the first half-hour of trading the Dow was off 18 points at 12,837.
Broader market indicators were mixed. The Standard & Poor's 500 index fell one point to 1,356 and the Nasdaq composite index, which is weighted toward technology stocks, edged up eight points to 2,942.
The direction for financial stocks was clear. JPMorgan led other bank stocks sharply lower after its late Thursday disclosure of a $2 billion loss at a London trading unit.
JPMorgan's blunder comes in the midst of a political battle over how closely to regulate banks, though JP Morgan's CEO Jamie Dimon said the trades would not have been affected by the so-called Volcker rule, expected to take effect this summer.
That didn't stop investors from cutting their exposure to the financial sector. Bank of America fell 2.2 percent, Morgan Stanley was down 4.2 percent, Citigroup fell 3.8 percent, and Goldman Sachs fell 3.9 percent.
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