‘Banks must keep better tabs on risks’

Bloomberg

The Federal Reserve, in a review of the massive losses banks incurred in the collapse of Archegos Capital Management, told lenders they must maintain sufficient margin when dealing with investment funds and are responsible for understanding their positions.
The regulator is still reviewing specific firms’ weaknesses and may take further action, the Fed said in a letter to all banks. It also issued a warning to the lenders it oversees, insisting they maintain a sufficient line of communication with investment funds with which they do business and remain aware of the risks they’re taking.
“Firms should obtain critical information regarding size, leverage, largest or most concentrated positions, and number of prime brokers with sufficient detail or frequency to determine the fund’s ability to service its debt,” the Fed said in its message.
Firms including Credit Suisse Group AG, Morgan Stanley and Nomura Holdings Inc. lost more than $10 billion in the debacle, spurring the Fed to conduct a review.
Archegos, Bill Hwang’s family office, imploded in March after amassing a concentrated portfolio of stocks exceeding $100 billion by using borrowed money. It collapsed after some of the shares tumbled, triggering margin calls from banks, which then dumped Hwang’s holdings.
The Fed is concerned when “firms accept incomplete and unverified information from the fund, particularly with regard to the fund’s strategy, concentrations, and relationships with other market participants,” the regulator said. “These concerns are heightened where a fund client has a history of concentrated positions and losses. More generally, these practices represent insufficient due diligence and may be inconsistent with safe and sound banking practices.”