May 17, 2012 / 7:50 PM / 7 years ago

UPDATE 1-Fed's Bullard - Break up JP Morgan, big banks

LOUISVILLE, Ky., May 17 (Reuters) - Another Federal Reserve policymaker o n T hursday called for the break-up of big banks like JPMorgan Chase & Co, saying that firm’s recent large trading loss underscores the difficulty of regulating such banks and the dangers they pose.

“This is why you want these companies to have plenty of capital,” St. Louis Fed President James Bullard said in response to questions after a speech to a Rotary Club. “I would back my colleague (Dallas Fed President) Richard Fisher in saying that we should split up the largest banks.”

Bullard’s comments echo those of Fisher, who advocates breaking up the five largest U.S. financial institutions. Fisher said in the wake of revelations that JPMorgan had reported $2 billion in losses due to derivatives trades that he is worried that the biggest banks do not have adequate risk management.

Bullard told reporters that his call for breaking up big banks includes JPMorgan.

“We do not need these companies to be as big as they are,” he said. The regulatory system would be much simpler if large firms were broken up, rather than trying to write complicated rules to capture all of the potential risks at complex firms, he added.

“It would be simpler to have smaller institutions so that they could fail if they need to fail,” Bullard said.

The St. Louis Fed president said he supports the principle underlying the so-called Volcker rule, which is aimed at preventing commercial banks from making extensive risky trades on their own account.

“You shouldn’t be taking insured deposits and be unrestricted in your activities with those insured deposits,” he said.

Discussing his forecast for moderate economic growth, Bullard acknowledged U.S. economic data has been mixed recently, but said it does not point to a loss of momentum in the recovery, as occurred in 2010 and 2011. Jobless claims below the 400,000 level suggest a labor market that is continuing to improve, he said.

The Labor Department on Thursday reported 370,000 new jobless claims for the latest week, unchanged from the previous week.

The likely economic softness in Europe resulting from the sovereign debt turmoil is unlikely to seriously dent the U.S. economic recovery unless it devolves into a full-blown financial crisis, which is unlikely, Bullard added.

“The direct trade effects are not large enough to really drag down U.S. growth in a really significant way,” he said. “It’s a bit of a drag, but not a large drag.”

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