May 8, 2008 / 12:16 AM / 10 years ago

US SEC scrutinizing investment bank liquidity

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission is scrutinizing the liquidity of investment banks it supervises and is planning to require the top Wall Street firms to publicly disclose their current liquidity and capital positions, SEC officials said on Wednesday.

Attention has been on funding at the biggest U.S. investment banks since March, when Bear Stearns Cos Inc BSC.N nearly collapsed after a sharp decline in its liquidity.

“We are discussing with (investment banks’) senior management their longer-term funding plans, including plans for raising new capital by accessing the equity and long-term debt markets,” Erik Sirri, the SEC’s director of trading and markets, said in prepared testimony to the Senate banking subcommittee on securities and investment.

The SEC monitors investment banks Morgan Stanley (MS.N), Lehman Brothers Holdings Inc LEH.N, Merrill Lynch & Co Inc MER.N, Goldman Sachs Group Inc (GS.N) and Bear Stearns for liquidity and capital levels as part of its consolidated supervised entities (CSE) program to enable the SEC to respond quickly to any financial or operational weakness in the companies.

SEC Chairman Christopher Cox said at a securities conference on Wednesday that the SEC is not waiting for new internationally accepted standards for capital and liquidity and has strengthened the liquidity requirements for the CSE firms.

There will be “more disclosure of actual capital and liquidity positions of the CSE firms in terms that the market can readily understand and digest,” Cox said.

Cox told reporters after the conference he is not sure how often the CSE firms would have to publicly report such information.

Senior lawmakers have called for stricter regulation of investment banks since they were given emergency access to the Federal Reserve’s discount borrowing window in March, as the credit crisis deepened.

The Federal Reserve took the unprecedented step of opening its discount borrowing window to investment banks after the Bear Stearns crisis. Bear Stearns, once the fifth-largest U.S. investment bank, is being acquired by JPMorgan Chase & Co (JPM.N).

Sirri said the SEC was increasing the companies’ liquidity level requirements and pushing for diversified funding sources.

He also said the SEC and Federal Reserve Board were developing a formal memorandum of understanding that would lay out the scope and mechanism for information sharing between those two agencies.


The SEC has been criticized for failing to prevent the Bear Stearns crisis. There has also been suggestions that the Fed should take over supervising investment banks.

Cox urged Congress to pass legislation to give the SEC or “another regulator” the explicit mandate to supervise investment banks.

“The statutory no-man’s land that continues ... should not be tolerated indefinitely,” he said.

    When asked if the other potential regulator for the investment banks would be the Fed, Cox said: “I want to be deferential to the judgment only Congress can make.”

    But he said there is little doubt the lack of an official investment bank regulator has created problems.

    “It’s difficult for anyone to say the system worked or that the regulatory gap that exists in statute lacks any consequence,” Cox said.

    Former SEC Chairman David Ruder balked at the idea of the Fed having sole supervision over investment banks and said Congress should give the SEC more authority and resources to oversee them.

    “The SEC has the ability to understand the risks of the investment banks. I would be cautious in letting the Fed have power over the entire securities and banking system,” Ruder told the hearing.

    Sen. Jack Reed, chairman of the Senate banking subcommittee on securities and investment, wants to give the SEC some $40 million more than it requested for its fiscal 2009 budget, which would include funding for monitoring investment banks.

    “We have heard from both Chairman (Arthur) Levitt and Chairman Ruder that that funding is probably overdue ... We will keep pursuing it. I hope we can get additional funding,” Reed told reporters after the hearing.

    Asked if he was considering legislation to make the SEC’s supervision of investment banks law, Reed said: “We heard the suggestion by the SEC that their ability would be enhanced by legislation, so certainly we are considering it.”

    Reporting by Rachelle Younglai, editing by Toni Reinhold and Andre Grenon

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