Morgan Stanley (MS) won’t sacrifice its $181 billion pool of cash, government debt and other liquid assets to meet proposed U.S. rules on how much capital it holds against total assets, Chief Financial Officer Ruth Porat said.
Risk management tied to liquidity is “sacrosanct” and won’t be compromised to boost the New York-based firm’s holding-company leverage ratio, which at 4.2 percent trails the proposed 5 percent minimum, Porat said today on a conference call with fixed-income investors. Morgan Stanley has plans to meet the leverage requirement by 2015, ahead of the proposed deadline of 2018, she said.
Morgan Stanley executives were questioned about balancing liquidity and leverage after European banks including Barclays Plc (BARC) said this week they will cut their pools of cash and other highly liquid assets to meet regulatory requirements for leverage ratios, which measure capital to total assets. Morgan Stanley’s liquidity coverage ratio was more than 125 percent, topping the minimum of 100 percent.
“We’re not to going to violate our core liquidity risk-management principles,” Porat, 55, said. “We’re running with a strong liquidity reserve. We think that’s a prudent thing to do.”
Porat’s comments echo those of Goldman Sachs Group Inc. CFO Harvey Schwartz, who told analysts last month that the leverage ratio wouldn’t change his firm’s thinking on liquidity.
“We’re never going to modulate our liquidity down because of a given metric that’s in the marketplace, even if an incentive exists for that,” Schwartz said on a conference call.
Morgan Stanley’s leverage ratio was the lowest among the biggest U.S. banks that disclosed a figure. Treasurer David Russo said today that it can reach the 5 percent minimum by reducing less-liquid assets in the firm’s fixed-income division, moving derivative trades into clearinghouses and increasing capital through earnings.
Russo said both of the firm’s U.S. bank subsidiaries exceed the 6 percent proposed minimum for deposit-taking units. That will allow Morgan Stanley to continue to move some derivatives into bank units to benefit from lower funding costs, Porat said.
The Basel Committee on Banking Supervision’s liquidity coverage ratio, scheduled to be phased in starting in two years, requires banks to hold enough “high-quality liquid assets” -- predominantly cash and government debt -- to survive 30 days of stress. The Basel group earlier this year expanded the types of assets that can be counted as liquid.