The Federal Reserve Bank of New York may ask foreign lenders formore detailed daily reports on liquidity as the U.S. steps upmonitoring of risks from Europe's sovereign debt crisis, accordingto two people with knowledge of the matter.

Regulators held informal talks with some of the largest Europeanlenders about producing a “fourth-generation daily liquidity” or 4Greport, according to the people, who asked for anonymity becausecommunications with central bankers are confidential. The reportsmay cover potential liabilities such as foreign-exchange swaps andcredit-default swaps, said one person. The U.S. has alreadyincreased the number of examiners embedded in these banks, theperson said.

Concern is growing that European lenders may falter as Greeceteeters on the brink of insolvency. U.S. Treasury Secretary TimothyF. Geithner has warned that failure to bolster European backstopswould threaten “cascading default, bank runs and catastrophic risk”for the global economy. European finance ministers were scheduledto meet today on how to shield banks from the fallout of a Greekdefault.

“The Fed is trying to understand what the pressure points are interms of liquidity and potential risks that are imposed by foreignbanks to domestic institutions in our financial system,” said KevinPetrasic, an attorney at the Washington-based law firm of Paul,Hastings, Janofsky & Walker LLC. “There is a little bit moresense of urgency as a result of what's going on in Europe.”

Liquidity Risk
U.S.-based money funds, whichbuy short-term commercial paper, have been shunning securitiesissued by some banks based on the continent, and European CentralBank Governing Council member Yves Mersch said Sept. 28 thatliquidity shortages pose the main risks to the region's bankingsystem.

Jack Gutt, a spokesman for the Federal Reserve Bank of New York,declined to comment. The largest European bank holding companies byassets in the U.S. include units of Deutsche Bank AG, HSBC HoldingsPlc. and Banco Bilbao Vizcaya Argentaria S.A., according to FederalReserve data. Duncan King, a spokesman for Frankfurt-based DeutscheBank, Thaddeus Herrick, a spokesman for Spain-based BBVA andLondon-based HSBC's Rob Sherman said they couldn't comment.

U.S. banks are starting to provide a 4G report and they arebeing phased in this month, said Karen Shaw Petrou, managingpartner of Washington-based Federal Financial Analytics Inc. SomeEuropeans are asking U.S. counterparts for information on how toprepare the report even though there has been no formal requestfrom the Fed so far, one of the people said.

Avoiding a Squeeze
“The report requires rapidand in some cases daily data on a banks' assets, liabilities andpotential claims to measure the degree to which the bank could becaught in the classic borrow-short, lend-long squeeze,” Petrousaid. “The 4G is one of the tools to reveal liquidity risk.”

The forms aren't public, according to Petrou, and the New YorkFed declined to provide a copy.

Euro-zone banks and other institutions were more than $350billion in debt to the Fed's emergency-lending facilities at onepoint during the 2008-2009 financial crisis, according to datacompiled by Bloomberg News. The analysis was based on Fed documentsreleased earlier this year after court orders upheld Freedom ofInformation Act requests by Bloomberg LP, the parent company ofBloomberg News, and News Corp.'s Fox News Network LLC. Fed lendingto these entities totaled more than $100 billion on an averageday.

Swap Contracts
Regulators lack access to dataon foreign institutions operating in the U.S. that would allow themto “make informed judgments about the adequacy of such firms'capital and liquidity buffers,” William C. Dudley, president of theNew York Fed, said in a Sept. 23 Washington speech.

U.S. prime money-market funds cut their exposure to euro-zonebank deposits and commercial paper, or short-term IOUs, to $214billion in August from $391 billion at the end of last year,according to JPMorgan Chase & Co. data. The funds are rationingtheir credit to European banks because of concerns that financialinstitutions will take large losses if a euro- zone nationdefaults.

Credit-default swaps allow bondholders to buy protection againstlosses if an issuer doesn't pay its debts. The contracts canentitle the holder to face value if the borrower defaults.Lawmakers and regulators have blamed misuse of swaps and lack ofdisclosure for helping to trigger the 2008 financial crisis.

A currency swap is a contract in which one party borrows onecurrency from another, and simultaneously lends another to thesecond party. Foreign-exchange swaps are used to raise foreigncurrencies for financial institutions and their customers, such asexporters and importers as well as investors.

Currencies and their related derivatives are among the mostactively traded markets in the world, with average daily turnoverreaching $4 trillion as of September 2010, according to Bank forInternational Settlements estimates.

Bloomberg News

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