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SEC focuses on liquidity of investment banks

  Securities  -   POSTED: 2008/05/07 16:00

The Securities and Exchange Commission is scrutinizing the secured funding activities of investment banks it supervises and is discussing the firms' longer-term funding plans, an SEC official told Congress on Wednesday.

Funding at the biggest U.S. investment banks has been in the spotlight since March, when Bear Stearns Cos Inc nearly collapsed from a sharp drop in its liquidity. Senior lawmakers such as Democrat Barney Frank, chairman of the House of Representatives Financial Services Committee, have called for stricter regulation of investment banks now that they have access to the Federal Reserve's discount borrowing window.

"We are discussing with 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 testimony prepared for delivery at a Senate hearing.

The SEC monitors investment banks Morgan Stanley, Lehman Brothers Holdings, Merrill Lynch & Co, Goldman Sachs Group and Bear Stearns as part of a supervisory program intended to respond quickly to any financial or operational weakness in the companies.

The SEC is also considering lengthening the firms' average term of secured and unsecured funding arrangements and discussing the amount of excess secured funding capacity for less-liquid positions, Sirri said.

"We are in the process of establishing additional scenarios, focused on shorter duration but more extreme events that entail a substantial loss of secured funding, that will be layered on top of the existing scenarios as a basis for sizing liquidity pool requirements," he said.

"This additional analysis is providing the basis for requiring firms to take steps such as increasing the term of secured funding and diversity of funding sources," he added.

In March, the Federal Reserve took the unprecedented step of opening its discount borrowing window to investment banks so they could shore up their capital levels after the Bear Stearns crisis.


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