Rosengren Says Banks Owning Broker Units Need More Capital

Bloomberg, April 17, 2013. All Rights Reserved.

Boston Federal Reserve President Eric Rosengren  said banks should hold more capital if they own a broker-dealer unit because such businesses pose greater risks during periods of financial stress.

“Bank holding companies with large broker-dealer affiliates should hold more capital to reflect the reduced stability of their liabilities during times of stress,” Rosengren said in prepared remarks for a speech today in New York.

Rosengren made his call as members of Congress and regulators try to reduce the risk that a large bank failure might result in a taxpayer-funded bailout. Senate Republicans and Democrats are discussing legislation that would boost capital standards. Fed officials are considering ways to curb balance-sheet expansion at the largest banks and toughen capital requirements for the largest firms.

“Despite the central role that broker-dealers played in exacerbating the crisis, too little has changed to avoid a repeat of the problem,” Rosengren said at the 22nd Annual Hyman P. Minsky Conference in New York. “I firmly believe that a reexamination of the solvency risks of large broker-dealers is warranted.”

The Fed-assisted emergency sale of Bear Stearns Cos. To JPMorgan Chase & Co. (JPM) in March 2008 was the first time since the Great Depression that the U.S. central bank had come to the assistance of a securities firm, as opposed to a bank.