* Rosengren, Dudley highlight post-crisis vulnerabilities
* Broker-dealer profitability trade-off 'may be unavoidable'
By Jonathan Spicer
NEW YORK, Aug 13 A serious re-evaluation of the
still-risky short-term funding market is overdue, two top
Federal Reserve officials said on Wednesday, with one urging a
supervisory revamp and higher capital requirements for
broker-dealers given the threat they still pose to the U.S.
Among the U.S. central bank's most influential voices on
regulation, the officials issued their warning to bankers,
supervisors and academics gathered at the New York Fed for a
conference on risks that remain in wholesale funding markets six
years after the financial crisis.
The Fed and other regulators have been pushing firms to bulk
up their capital to avoid a repetition of the 2008 crisis, in
which Lehman Brothers' failure highlighted how quickly
broker-dealers can lose investors' confidence and access to
cheap short-term funds.
It is "interesting" that so little has changed for
broker-dealers given Lehman was one, Boston Fed President Eric
Rosengren said. A "comprehensive re-evaluation of broker-dealer
regulation is overdue."
New York Fed President William Dudley said changes must be
made in part because it is now more difficult, in the
post-financial crisis era, for the central bank to intervene in
wholesale markets in the face of fire-sales or investor runs.
Some "important issues and vulnerabilities remain," Dudley
said. "It is essential to make the system more stable."
The comments appeared to bolster the stance of Fed Chair
Janet Yellen, with Rosengren offering a handful of approaches as
regulators attempt to fill in the gaps left by the landmark 2010
Dodd-Frank financial regulation law. The law has been criticized
for overlooking the so-called shadow banking industry, including
funds and insurers, that reside outside of formal banking.
Rosengren floated several rule changes that would limit
broker-dealers' reliance on short-term wholesale funding and
reduce the risk of runs.
While the most direct way to solve this is with higher
capital standards, he said, regulators could also limit the
extent to which the firms could use short-term repurchase
agreements to fund longer-term or higher-risk assets. Money
market mutual funds could also be prohibited from holding repos
secured by such assets, many of which they are not allowed to
hold, he said.
Rosengren even floated the Fed as a permanent liquidity
backstop for broker-dealers - though he acknowledged that such
an outcome seemed "unlikely."
Such moves "would have an impact on the profitability of
broker-dealers," he said. "But given recent history, that
trade-off may be unavoidable and in the public interest from a
financial stability perspective."
Last month the Securities and Exchange Commission, which
regulates individual market participants, adopted moderately
tougher rules for money market mutual funds, which are the
biggest domestic players in wholesale markets.
Rosengren slammed the rules when they were proposed last
year. But on Wednesday he softened that criticism, saying that
while he would have preferred even more protection on runs on
the funds, the new requirement for "prime" money funds to float
their values "does represent a meaningful improvement."
He repeated that withdrawal restrictions available to the
funds, known as "gates," remained a problem and said he hoped
that element of the SEC's rules would fade in importance in the
The Fed officials did not comment on monetary policy or the
(Reporting by Jonathan Spicer; Editing by Meredith Mazzilli)