| WASHINGTON, March 3
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
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
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."