Fed officials urge changes to still-risky U.S. funding markets

Wed Aug 13, 2014 10:48am EDT
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By Jonathan Spicer

NEW YORK (Reuters) - 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. financial system.

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.   Continued...

The Federal Reserve Bank of Boston's President and CEO Eric S. Rosengren speaks during the "Hyman P. Minsky Conference on the State of the U.S. and World Economies", in New York, April 17, 2013. REUTERS/Keith Bedford