WASHINGTON, March 3 The Federal Reserve's tough new capital rules for foreign banks with U.S. operations constitute a power grab to oversee stock brokerages that could ultimately harm market liquidity, a top U.S. securities regulator said Monday.
In prepared remarks for a conference hosted by the Institute of International Bankers, Securities and Exchange Commission member Daniel Gallagher blasted the Fed's new rules and warned they could have "profound impact" on broker-dealers.
"The last thing anyone wants is the old Washington cliché of a turf war," Gallagher, a Republican, told the bankers.
"When it comes to the broker-dealer subsidiaries of banks, however, we stand ready to work with the Fed and other banking regulators to ensure that any new rules applicable to those entities are enhancements to our existing regime, not duplicative, contradictory or counterproductive regulations."
The Fed last month issued new rules for capital and liquidity that are designed to shield U.S. taxpayers from potential bailouts of foreign banks.
Under the rules, large foreign banks with sizeable U.S. operations, such as Deutsche Bank and Barclays , will be required to lump all their U.S. businesses under a holding company. Foreign banks do not have that structure for their U.S. operations.
The new structure will be held to the same leverage and capital risk-based rules as U.S. banks, and will be subject to other Fed requirements such as stress-testing.
Gallagher said the plan is flawed because U.S.-based brokerages that are already regulated by the SEC will be swept up into the new holding company structures - and would then fall under Fed regulation.
U.S. broker dealers and banks are regulated under very different types of regimes. Although both entities are subject to capital requirements, the rules for banks are designed to reduce risk, protect against losses and improve safety and soundness.
Net capital rules for brokerages, however, are more geared toward risk-management, so that if a brokerage fails, it can be liquidated and customers' money can be transferred to another firm.
Gallagher said Monday he is also concerned that under the Fed's rules, some brokerages would be subject to an additional 2 percent leverage buffer on top of the 3 percent that is mandated by the Basel III capital rules.
"This will incentivize broker-dealers within bank holding companies to reduce the size of their balance sheets," he added.
"Specifically, it could induce broker-dealers to reduce the amount of highly leveraged but low return transactions in which they engage - most importantly, repo and stock loan activity."