Federal Reserve Increasing Scrutiny of Bank Payment Systems -- Update
August 26 2015 - 3:28PM
Dow Jones News
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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