WASHINGTON — Treasury Secretary Tim Geithner said Tuesday that the $2 billion trading loss at JPMorgan Chase makes a "powerful case" for the financial reforms being implemented under the Dodd-Frank Act.
Speaking at the Peterson Foundation's Fiscal Summit in Washington, Geithner said the JPMorgan loss was one of four serious tests of the financial system since the crisis, including the financial shock from Europe, the collapse of MF Global and the debt limit showdown and subsequent credit rating downgrade.
"This points out how important it is that the reforms are strong enough and effective enough that they can meet that key test," Geithner said, "not to protect shareholders from losses … but to make sure that when those mistakes happen - and they're inevitable - that they're modest enough in size and that the system as a whole can handle them."
"And we're going to make sure that we meet that basic test."
Geithner said he has not spoken with Jamie Dimon since the JPMorgan chief executive revealed the loss last week, which Geithner dubbed a "risk management failure." But he said regulators "are going to take a very careful look at this and make sure we understand what this means" for the broader set of reforms, including the Volcker Rule, capital and liquidity requirements, leverage limits and new derivatives rules.
"The test of reform is not whether you can prevent banks from making mistakes," he said. "The test of reform should be, 'Do those mistakes put at risk the broader economy, the financial system or the taxpayers?'"
The best way to prevent that from happening is to force banks to hold more capital, to bring down leverage and to make sure the rest of the system has better cushions against these kinds of mistakes, Geithner said.