SEC's Cox backs update to liquidity guidelines

By Karey Wutkowski

WASHINGTON (Reuters) - The Securities and Exchange Commission said in a letter to international banking authorities on Thursday that Bear Stearns Cos BSC.N exceeded regulators' capital requirements even as its sale to JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) was announced on Sunday.

SEC Chairman Christopher Cox said in a letter to the chairman of the Basel Committee on Banking Supervision that he strongly supports the group's decision to update the guidance for managing liquidity in banking organizations.

"Counterparty withdrawals and credit denials, resulting in a loss of liquidity -- not inadequate capital -- caused Bear's demise," Cox said in the letter dated March 20.

During last week's liquidity crisis, Bear Stearns clients withdrew what media reports have said amounted to $17 billion from the bank. That led to JPMorgan, with the backing of the Federal Reserve, stepping in with rescue financing and then with a proposal to buy the company at a fire-sale price.

The Basel Committee on Banking Supervision has announced that in light of recent market turmoil, it intends to update the February 2000 guidance on sound practices for banks to manage liquidity.

International banking regulators have crafted, but banks have not yet been forced to comply with, new international capital standards called Basel II. That accord is aimed at better matching capital reserves to reflect market, operational and credit risks.

Cox said in the letter that he agrees with the Basel Committee's opinion that the events leading to Bear Stearns' sale "highlight the importance of liquidity management in meeting obligations during stressful market conditions."

He said at all times until its JPMorgan deal agreement, Bear had a capital cushion well above, not only current capital standards, but under the Basel II standard.