NEW YORK, April 17 Regulators must do more to address the lingering risks that broker-dealers pose to U.S. financial markets, a top U.S. Federal Reserve official said on Wednesday.
In a speech, Boston Fed President Eric Rosengren bemoaned the lack of meaningful reforms since the failures of Bear Stearns and, especially, Lehman Brothers set off the worst of the global financial crisis in 2008.
"Despite the central role that broker-dealers played exacerbating the crisis, too little has changed to avoid a repeat of the problem, I am sorry to say," Rosengren told the annual Hyman P. Minsky conference in New York.
"In short, I firmly believe that a re-examination of the solvency risks of large broker-dealers is warranted."
Rosengren, who has a big hand in regulatory policy at the Fed, said officials should seriously consider forcing broker-dealers to hold "significantly more" capital than ordinary banks in order to avoid runs. This would reflect the reduced stability of their liabilities during times of stress, he said.
Ordinary depository institutions have government deposit insurance and access to emergency funds from the central bank.
In the United States, post-crisis legislation now requires big banks to hold more capital and liquid assets, undergo stress tests and submit to the Fed "living wills" outlining how they would be wound down in a serious crunch.
Many broker-dealers that were independent before the crisis are now owned by big banks. But Rosengren said "that doesn't really insulate them at all" and the notion remains that the government will step in to bail them out in a crisis.
They "remain vulnerable to losing the confidence of funders and counterparties should the world economy again experience a significant financial crisis," he said.
"If broker-dealers assume that they will once again have access to such government support should markets be disrupted, they will have little incentive to take the steps necessary to shield themselves from financing problems during a crisis and thus minimize their need for a government backstop."