The collapse of Bear Stearns Cos. appears to be leading the Securities and Exchange Commission to impose higher capital requirements on investment banks.
The SEC is meeting with Wall Street banks that have lost money from the mortgage crisis to discuss the possible requirement to set aside more cash, according to a report in Bloomberg News that cites a letter from SEC Chairman Christopher Cox to Senator Charles Grassley that was made public. The SEC is reviewing whether the banks should seek new loans to support their “less-liquid positions,” the news service reported.
“A likely outcome of this process will be the articulation of additional supervisory expectations related to liquidity,” Cox said in the letter. He also stressed that the SEC is focused on “requirements that will increase resiliency” when investment banks can’t easily secure funding.
The SEC currently requires Wall Street firms to have enough funding to meet expected obligations for at least one year during periods of market turmoil, Bloomberg pointed out. Key to this policy is the notion that the firms would be able to secure new loans by putting up assets such as U.S. Treasuries as collateral.
Cox noted in April 3 testimony before the Senate Banking Committee, however, that the requirement did not prevent the “unprecedented” situation at Bear Stearns, which was unable to secure loans even if it offered to put up “high-quality collateral,” according to Bloomberg.
On Wednesday, the Wall Street Journal reported that the SEC dropped a probe of Bear Stearns that had been looking at whether it harmed investors by improperly valuing complex debt securities. This placed the SEC on the defensive, calling into questions whether it has lost some of its regulatory bite.