When the news of JP Morgan’s multi-billion trading lost first leaked to the press, there was no shortage of unanswered questions. One of the most prominent centred on how regulators failed to catch these losses before they happened. However, from the regulatory perspective, catching trading blunders may not be as easy as it seems.

So let’s say hypothetically that you are a regulator working on location at JP Morgan. Your primary responsibilities include monitoring JP Morgan’s trading (including daily P&L and risk exposures) and responding to all requests for more information from Fed officials. Each day, you notice massive losses in one of JP Morgan’s trading books. Then you decide to delve into the matter deeper by looking at the bank’s latest risk report—which is a month old.

• “Why is it so old?”

Quite simply, correctly aggregating multi-billion dollar trading exposures across a global organisation—especially for complicated products like credit default swaps (CDS)—takes more time than most risk managers care to admit.

Upon reviewing the risk reports, you discover relatively low risk exposures.

• How could this be?
• Perhaps the risk reports are wrong?
• Should you examine some other report?

No, instead you decide to raise this issue with JP Morgan’s market risk management team during your monthly meeting. At this point, the head of risk management explains in very elaborate (and sometimes unintelligible) terms that the firm put on complex hedges to offset its CDS exposure. “The losses are merely a result of market volatility brought about by uncertainty in the euro-zone,” they may explain in a dismissive manner. Since regulators have limited access to data on the unregulated CDS market, you are clueless that liquidity has almost dried up. Perhaps the market risk team’s explanations satisfied your curiosity. You might ask for more documentation, only to be drowned in a flood of meaningless reports. Or maybe you move onto bigger fish, reasoning that there are no rules prohibiting banks from losing their own money. (After all, the counterparties on the other side of those trades are making a killing.)

Amid the mounting pressure on regulators to cure all that ails the banking industry, perhaps we should step back for a moment to ask a few questions:

• Is the mission of regulators to stop banks from actually losing money, especially when no regulations have been violated?
• Has the mission of bank regulators morphed into helping foster confidence in our financial systems?
• Or is the reality that banks have become too big to succeed for any length of time?

With big bets, the specter of big losses is always looming around the corner. I suspect many regulators are silently praying that Glass-Steagall is resuscitated—taking us back to a time when there was a clear division between commercial and investment banking. Until then, we should all keep our fingers crossed that banks have learned their lesson.