UPDATE: Fed’s Rosengren Says Broker-Dealers Need More Capital

The Wall Street Journal, April 17, 2013. All Rights Reserved.

NEW YORK–The most recent overhauls 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 institutions might pose in a period of renewed financial stress, the central banker said.

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

Mr. Rosengren didn’t 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 overhaul 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 with 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 under the status quo, new trouble could force a return of Fed emergency-lending facilities tailored to support broker-dealer operations. That would be a bad outcome, Mr. Rosengren said.

In comments to the audience, Mr. Rosengren said he believes Fed stimulus policies were helping the economy, and he remains concerned credit standards for the mortgage market have become tighter than they should be. He said there are signs of life now appearing in the housing and car markets.

Mr. Rosengren also said he is strongly supportive of the current stance of monetary policy.