Fed’s Rosengren: Broker-Dealers Are Potential Threat to Stability

Fox Business, April 17, 2013. All Rights Reserved.

The most recent reforms of the financial regulatory system have left Wall Street’s broker-dealers largely untouched and a continued threat to the financial stability, a Federal Reserve official said Wednesday.

"Despite this history of failure and substantial government support, little has changed in the solvency requirements of broker-dealers," Federal Reserve Bank of Boston President Eric Rosengren said. "The status quo represents an ongoing and significant financial stability risk."

"Consideration should be given to whether broker-dealers should be required to hold significantly more capital than depository institutions" to help mitigate the threat these institution might pose in a period of renewed financial stress, the central banker said.

Mr. Rosengren is a voting member of the monetary policy Federal Open Market Committee. His comments came from the text of a speech to be delivered before a gathering held by the Levy Economics Institute of Bard College, in New York.

Mr. Rosengren did not address monetary policy or the economic outlook in his formal remarks. The official has in a number of speeches shown a great interest in financial stability and unresolved matters that exist in the wake of the passage of the Dodd-Frank reform legislation. In past speeches, Mr. Rosengren has shown a considerable amount of alarm about money market funds, which he sees as subject to destabilizing runs.

In his speech, the official highlighted the role broker-dealers like Bear Stearns and Lehman Brothers played in the financial crisis. In the current environment, many of these types of operations have been subsumed into bank holding companies with levels of access to the traditional safety net, but he sees still insufficient levels of capital compared to the risks these firms may be exposed to.

"Being housed within a bank holding company should not obviate the need for the broker-dealer subsidiary to hold more capital," Mr. Rosengren said. "Broker-dealers remain vulnerable to losing the confidence of funders and counterparties should the world economy again experience a significant financial crisis."

The official worried that under the status quo, new trouble could force a return of Fed emergency lending facilities that are tailored to support broker-dealer operations. That would be a bad outcome, Mr. Rosengren says.