Eric Rosengren, the President of the Federal Reserve Bank of Boston, said big international banks that have broker-dealer businesses carry risks to the financial system. He said regulators must see to it that these lenders have enough capital.
In a speech, Rosengren said, "Global banks with significant investment banking and broker-dealer activities pose significant potential risk to the financial system and should be among the best capitalized large banking organizations." Rosengren added that broker-dealer operations mostly rely on short-term financing, which could be very risky in the event of a financial crisis.
In the speech he delivered to the Financial Stability Institute of the Bank for International Settlements, Rosenberg said his concerns were not merely based on theory. He said, "These concerns are far from theoretical, in that many difficulties in the fall of 2008 stemmed from runs on institutions that were reliant on wholesale funding -- and many of those firms failed or were acquired."
According to a Bloomberg report, the financial crisis, which struck from 2007 to 2009, have prompted regulating agencies worldwide to impose stricter standards on capital, especially on large institutions that were considered important for the stability of financial markets. The Federal Reserve in the US and other agencies have implemented stricter regulatory standards of the Dodd-Frank Act three years after it was signed to law.
Rosengren added, "Large global banking organizations with large broker-dealers are organizations where leverage ratios and capital charges on wholesale funding are particularly appropriate." To make sure that capital funding is enough, Rosengren said capital charges could be imposed on bank holding companies which rely highly on wholesale funding.
Rosengren became the president of the Boston Federal Reserve in 2007. He previously served as the supervisor and economist at the district bank before his appointment, Bloomberg reported. He is 56 years old.
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