Regulation – large US investment banks to report on liquidity, says SEC

Christopher Cox

Cox said that, whilst financial institutions had become adept at distributing risk through many different products, they had also made a complex maze of direct and indirect counterparties. Whilst US conglomerates that have a retail bank in their group are obliged to report at a group level, this requirement is still voluntary, unlike in the European Union, for investment banking groups.

This absence of any statutory requirement for consolidated capital and liquidity reporting is untenable in the aftermath of Bear Sterns, said Cox. The SEC was now working with the Basel Committee to expand Basel II into liquidity risk requirements and, in the US, was requesting for information on concentration and liquidity risk for both secured and unsecured lending for consolidated supervised investment banking entities (CSEs). “There will also be more disclosure of actual capital and liquidity positions of the CSE firms in terms that the market can readily understand and digest. The CSEs will institute public disclosure of their capital ratios computed under the Basel Standard later this year, and then phase in additional disclosure related to concentration of exposures.”

Cox concluded by saying that future regulation of investment banking groups needs to take into account daily mark-to-market accounting, liquidity risk and the availability of external liquidity provisions. He said “regulators and policy makers in Washington are working hard to ensure that the proper lessons are derived from these experiences [Bear Sterns and the sub-prime crisis], and that rapid and significant changes are made in the regulatory process to put that learning quickly into effect. That important work is going on not only at the SEC, but also within IOSCO, the Basel Committee on Banking Supervision, and the Financial Stability Forum.”