Broker-dealers' solvency needs to be examined, according to Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren, who stressed "the need for more regulatory focus on broker-dealers."
"Despite the central role that broker-dealers played in exacerbating the [financial] crisis, too little has changed to avoid a repeat of the problem, I am sorry to say," Rosengren told the Hyman P. Minsky Conference, according to prepared text released by the Fed. "In short, I firmly believe that a reexamination of the solvency risks of large broker-dealers is warranted."
These firms "did not perform well during the financial crisis," with "many" failing or "converted to or subsumed into bank holding companies," Rosengren said. "Despite these structural changes, significant government intervention was required to maintain market functioning and liquidity, in markets key to the stability of the U.S. financial system and the economy that relies on it."
He continued, "Unfortunately, despite this history of failure and substantial government support, little has changed in the solvency requirements of broker-dealers. The status quo represents an ongoing and significant financial stability risk. In my view, then, consideration should be given to whether broker-dealers should be required to hold significantly more capital than depository institutions, which have deposit insurance and pre-ordained access to the central bank's Discount Window."