Wall Street banks are likely to be required to hold more cash and cash equivalents during periods of market stress under plans being considered by US regulators.
The discussions come amid a broad review by the Securities and Exchange Commission of funding programmes at big investment banks following last month’s collapse of Bear Stearns, which was reliant on short-term funding and found itself unable to borrow as rumours about its condition spread.
“A likely outcome of this process will be the articulation of additional supervisory expectations related to liquidity,” said Christopher Cox, SEC chairman, in a letter dated April 16 to Senator Charles Grassley, who requested further details on Bear’s demise. The SEC is also discussing whether firms should have extra secured funding for “less liquid” positions, he wrote.
Several banks, including JPMorgan Chase, Lehman Brothers, Merrill Lynch and Citigroup, have already tapped capital markets in recent weeks, raising at least $28bn of fresh capital through the sale of preferred shares and long-term debt.
But there is a growing focus by policymakers on the liquidity-risk management policies and practices at big investment banks. Some have suggested there should be tighter liquidity requirements in general, not just during times of stress.
Bank executives say they are regularly meeting SEC and Federal Reserve officials to discuss their capital positions and the nature of their funding sources.
They say regulators have stressed the need for a diversity of lenders and more reliance on long-term debt.
Some expect regulators to require them to keep more core excess capital, or cash and highly liquid securities, they can tap in times of market distress.
Goldman Sachs, for its part, keeps more than $80bn in short-term securities in an account at the Bank of New York.
However, one banker said the firms had not been given any indication of an impending tightening in their capital ratio requirements.
Under current standards, banks are required to have enough liquidity to withstand one year without unsecured credit, but those standards also assume firms would still be able to borrow against their collateral even if unsecured funding dried up.
The banks declined to comment on their discussions with regulators.