Updated Sunday, November 23, 2014 as of 1:48 PM ET

B-Ds Need Higher Capital Requirements, Says Fed Official

(Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren said brokerage regulation needs a “major re-examination”to prevent funding shortfalls during a crisis and that brokers should have higher capital requirements.

“Broker-dealers can experience significant funding problems during times of financial stress,” Rosengren said in remarks prepared for delivery to a Fed conference on wholesale funding risk in New York. “Unfortunately that potential for problems has not been fully addressed since the crisis.”

Firms that depend on unstable funding should be required to “hold significantly more capital” than if they relied on more stable sources, Rosengren said. Such requirements should apply to large independent brokers, foreign firms with U.S. holding companies and banks with “major” brokerages. Companies should use more long-term debt to finance positions because it “reduces the need for short-term and more ‘runnable’ funding,” he said.

Fed officials have warned the web of repurchase agreements, or repos, remains prone to unravel in a panic, leading to fire sales of assets that could spread losses across the financial system. The failure of Lehman Brothers Holdings Inc. in 2008 was due in part to its inability to renew short-term funding deals as the value of its collateral plunged.

Rosengren said the risk of runs could be cut by limiting how short-term repo agreements held by intermediaries can be used to finance long-term assets or high-credit-risk assets. While tighter regulation would reduce broker profits, history shows “that trade-off may be unavoidable and in the public interest from a financial stability perspective,” he said at the event organized by the Boston and New York reserve banks.

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