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US financial regulators are working on new short-term borrowing rules
 
  Hedgeweb - MON, SEP 28 2009
News Regulators are considering proposals to prevent banks from growing overly dependent on short-term borrowings ?? as was the case with Bear and Lehman. The idea behind the discussions is that capital alone is not enough to prevent a run on a bank that depends on the overnight markets for funding.

??Capital is critical, but liquidity enhancement is a necessary piece of the puzzle,? said Kevin Bailey, deputy comptroller for regulatory policy at the Office of the Comptroller of the Currency, which regulates national banks. The proposals being discussed would require banks to operate under new measures ?? or ratios ?? gauging their dependence on short-term funding and their susceptibility to market shocks.

One ratio would compare a bank??s assets to its stable sources of funding, such as deposits or longer-term unsecured debt. This would help regulators determine whether a bank is too dependent on short-term borrowings.

Another ratio would compare borrowings to easily sold assets ?? measuring, in other words, how quickly a bank could unwind its positions were it to lose its access to short-term market funding. The ratios would come on top of guidance on liquidity issues proposed by banking regulators in July. Those proposals were part of a global effort to address bank liquidity.

The focus on funding reflects a growing recognition on Wall Street that banks became too dependent on cheap overnight borrowings in the run-up to the crisis.

 
 
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