By Emily Glazer 

The Federal Reserve is heightening its scrutiny of how large U.S. banks track trillions of dollars of payments that flow through its systems each day, as increasing volatility in the stock market underscores the importance of banks' monitoring their money, people familiar with the matter said.

The Fed sent some of the largest U.S. banks, including J.P. Morgan Chase & Co., Bank of America Corp., Bank of New York Mellon Corp. and Citigroup Inc., notices earlier this year on their ability to monitor payments real-time. After the chaos of the financial crisis, the Fed has been pushing the banks to account for such payments as soon as they are settled, instead of hours later or at the end of the day.

J.P. Morgan is slated to meet this week with the Fed to review the bank's responses to regulator concerns, including new systems and internal groups dedicated to payment monitoring that the bank has added, some of the people added. J.P. Morgan's chief executive, James Dimon, said in a shareholder letter this year that the bank has assigned 400 people to help on the project.

While Bank of America and Citigroup also received the Fed's "Matters Requiring Attention" notices, the regulators have focused more on J.P. Morgan and BNY Mellon because they are large players arranging and settling trades in the $39 trillion U.S. fixed-income market.

Banks have spent more than six years since the financial crisis boosting cash and making their balance sheets safer to meet tougher regulatory requirements. Still, regulators have remained vigilant about scenarios that could imperil banks' significant cash cushions such as rising interest rates or the types of sharp market swings that investors have witnessed this month.

"The current market events certainly bring to the fore the questions being asked by regulators" on monitoring payments, said Mark Trivedi, who leads J.P. Morgan's initiative on the issue, known among bankers as "intraday liquidity."

The Fed and other regulators highlighted intraday liquidity in a 2010 report, saying "an institution's failure to manage intraday liquidity effectively, under normal and stressed conditions, could leave it unable to meet payment and settlement obligations in a timely manner."

Within banks' payments systems, transactions are often paid out in the morning but not settled until later in the day. Banks use various tools to manage any timing mismatch and make sure no accounts fall below their minimums.

After the financial crisis, regulators grew concerned about the ability of financial institutions to cover their payment obligations, especially during times of market stress, said Catherine Banneux, senior market manager, banking markets at the Society for Worldwide Interbank Financial Telecommunication, a member-owned financial industry cooperative.

The issue came to light during the 2008 demise of Lehman Brothers Inc., when big financial players struggled to quantify their exact exposure to the failed brokerage firm. In 2011, after MF Global Holdings Ltd.'s bankruptcy left some of its brokerage customers with big losses, some noted that closer monitoring of the firm's real-time liquidity position might have helped prevent problems.

Bank regulators are continuing to look at the issue as part of their efforts to make lenders and the financial system safer over time. It likely will take the banks involved in the area years to fully meet the Fed's expectations; some are further along than others.

In the last week, large market swings haven't caused any liquidity concerns at banks, though some large banks were watching their cash balances closely as clients sold stocks and loaded up on cash, people familiar with the banks said.

At J.P. Morgan, which has spent tens of millions of dollars on its payment initiatives, Mr. Trivedi said he has used the bank's monitoring systems to answer an influx of questions from colleagues about whether money is leaving the bank and if the bank is bringing on new payments customers amid the tumult.

The bank, the largest in the U.S. by assets, hopes to expand its real-time payment monitoring in securities trading and currencies later this year, Mr. Trivedi said.

A possible looming concern: Interest rates, which have been low and stable for years, could start rising. That could prompt bank customers to move money in various ways, including some that would lower "abnormally high" bank cash reserves, says Gerard Cassidy, a banking analyst with RBC Capital Markets.

Write to Emily Glazer at emily.glazer@wsj.com

 

(END) Dow Jones Newswires

August 26, 2015 15:13 ET (19:13 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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