April 23 (Bloomberg) -- The U.S. Securities and Exchange Commission, responding to the collapse of Bear Stearns Cos., may require Wall Street banks to keep more cash on hand during periods of market stress.

The SEC is meeting with investment banks that have lost money on mortgage holdings to discuss raising capital, SEC Chairman Christopher Cox said in an April 16 letter to U.S. Senator Charles Grassley made public today. The agency is also reviewing whether securities firms should seek new loans to support their ``less-liquid positions,'' Cox said.

``A likely outcome of this process will be the articulation of additional supervisory expectations related to liquidity,'' Cox said in the letter to Grassley, an Iowa Republican who is reviewing Bear Stearns's forced sale to JPMorgan Chase & Co.

The SEC is focused on ``requirements that will increase resiliency'' when investment banks can't easily secure funding, Cox said. Any change may crimp Wall Street profits, because firms would have to hold more cash and low-yielding securities instead of lending money or making investments.

``Given the fact that we just lost a brokerage firm to a funding run on a Friday when it met all of the capital rules on a Thursday, then I would say that improvements in liquidity rules are a wise thing to do,'' said Sanford C. Bernstein's Brad Hintz, the third-ranked securities analyst according to Institutional Investor magazine.

The SEC monitors Bear Stearns, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley to make sure they have adequate capital and liquidity.

Capital Standards

The agency currently requires that those firms have enough funding to meet expected obligations for at least one year during periods of market turmoil, according to the agency's Web site. The mandate assumes securities firms will still be able to get new loans by putting up assets such as U.S. Treasuries as collateral.

That requirement didn't prevent the ``unprecedented'' situation at New York-based Bear Stearns, which couldn't secure loans even if it offered to put up ``high-quality collateral,'' Cox said in April 3 testimony before the Senate Banking Committee. The SEC is urging securities firms to extend the duration of their funding agreements with other banks, he said.

JPMorgan agreed last month to buy Bear Stearns for $10 a share after a run by clients and lenders put the company on the verge of bankruptcy. The Federal Reserve, which is now lending money to investment banks for the first time since the Great Depression, orchestrated the sale to prevent a market panic.

Treasury Blueprint

The SEC is reevaluating liquidity requirements after the Treasury Department released a report last month recommending the Fed gain more authority over Wall Street banks. The Treasury also proposed that new regulators take on most of the SEC's responsibilities.

The SEC also faces scrutiny from members of Congress, who have questioned its supervision of investment banks. U.S. Senator Jack Reed, a Rhode Island Democrat, said April 1 that the agency ``appears to have been caught off-guard by the seriousness of the situation at Bear Stearns.''

Cox said last week that Congress could improve SEC oversight by passing legislation to back its supervision of investment banks and providing the agency with ``dedicated funding'' to pay for it. Investment banks now submit to SEC scrutiny of their liquidity on a voluntary basis.

In his letter, Cox declined to tell Grassley why the SEC dropped an investigation into Bear Stearns's pricing of debt securities, saying the agency pursues ``inquiries on a confidential basis.''

The SEC probed whether Bear Stearns improperly valued $63 million of collateralized debt obligations it sold to a Puerto Rican Bank. The agency told Bear Stearns in 2005 it may be sued over sales, people familiar with the matter said at the time.

The Wall Street Journal reported Cox's refusal to discuss the investigation earlier today.

SEC spokesman John Nester declined to comment when contacted by Bloomberg News.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: April 23, 2008 17:39 EDT