JPMorgan Chase & Co. (NYSE: JPM) has been fined €12.18 million by the European Central Bank (ECB) after its German unit, J.P. Morgan SE, misreported key capital metrics tied to risk-weighted assets, capital ratios, and credit exposure. The supervisory action follows findings that reporting errors persisted from 2019 to 2024, affecting how regulators assessed the bank’s risk profile under EU banking rules.
For 15 consecutive quarters, J.P. Morgan incorrectly classified corporate loans. This error caused the bank to apply lower risk weights than required by banking rules. In simple terms, the bank made its loans appear safer than they really were. Meanwhile, for 21 consecutive quarters, the bank excluded certain transactions when calculating credit valuation adjustment (CVA) risk. CVA risk measures the chance that a counterparty in a derivative transaction might default. Leaving out these transactions reduced the reported level of risk, giving a misleading picture of the bank’s financial exposure.
The ECB stated that both breaches were caused by serious negligence. The bank’s internal controls did not detect the problems in time, which allowed the misreporting to continue for years. As a result, regulators were denied a complete understanding of the bank’s true risk profile. Accurate reporting is essential for monitoring the health of banks and the wider financial system.
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Understanding Risk-Weighted Assets and Capital Ratios
Risk-weighted assets (RWA) are calculations that banks use to figure out how much money they need to keep as a cushion against possible losses. The higher the RWA, the more capital a bank must hold to remain safe. By reporting lower RWAs than required, J.P. Morgan showed capital ratios that were higher than the bank actually had. Capital ratios indicate a bank’s financial strength and its ability to handle losses. Inflated ratios can make a bank appear safer and stronger than it really is.
Misreporting RWAs is serious because it hides the actual level of risk a bank faces. Regulators like the ECB rely on accurate numbers to make sure banks can withstand financial shocks. Errors in reporting can undermine trust in the banking system and interfere with proper supervision. In this case, the errors affected two types of risk: credit risk and CVA risk, both crucial to understanding how exposed the bank is to potential defaults.
The credit risk error involved misclassifying corporate loans, which lasted 15 quarters. The CVA risk error involved excluding certain transactions from the risk calculations, which lasted 21 quarters. Together, these errors misrepresented the bank’s risk profile for many years, highlighting the importance of thorough internal checks and proper reporting procedures in large financial institutions.
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ECB’s Penalties and Legal Authority
The ECB classifies breaches by severity to decide the size of fines. In J.P. Morgan’s case, the credit risk misreporting was classified as “severe,” and the CVA risk misreporting as “moderately severe.” These classifications contributed to the total fines of €12.18 million. The ECB applies a detailed method to determine fines, considering the seriousness, duration, and impact of each violation.
J.P. Morgan has the right to challenge the penalties. If it disagrees with the ECB’s decision, the bank can appeal to the Court of Justice of the European Union, following the rules of European law. The ECB’s authority to impose fines comes from Article 18 of Council Regulation (EU) No 1024/2013, which allows the bank supervisory authority to enforce rules and ensure accurate reporting.
The fines demonstrate the importance of maintaining strong internal controls and reporting systems in banks. Misreporting key financial figures is treated as a serious offense because it affects the stability of the financial system and the ability of regulators to monitor risks effectively. Detailed information about these sanctions, including the ECB’s classification of the breaches and fines, is publicly available on the ECB’s supervisory sanctions web page, ensuring transparency in regulatory actions.