By Sarah N. Lynch
WASHINGTON, March 3 (Reuters) - The Federal Reserve's toughnew capital rules for foreign banks with U.S. operationsconstitute a power grab to oversee stock brokerages that couldultimately harm market liquidity, a top U.S. securitiesregulator said Monday.
In prepared remarks for a conference hosted by the Instituteof International Bankers, Securities and Exchange Commissionmember Daniel Gallagher blasted the Fed's new rules and warnedthey could have "profound impact" on broker-dealers.
"The last thing anyone wants is the old Washington cliché ofa turf war," Gallagher, a Republican, told the bankers.
"When it comes to the broker-dealer subsidiaries of banks,however, we stand ready to work with the Fed and other bankingregulators to ensure that any new rules applicable to thoseentities are enhancements to our existing regime, notduplicative, contradictory or counterproductive regulations."
The Fed last month issued new rules for capital andliquidity that are designed to shield U.S. taxpayers frompotential bailouts of foreign banks.
Under the rules, large foreign banks with sizeable U.S.operations, such as Deutsche Bank and Barclays, will be required to lump all their U.S. businessesunder a holding company. Foreign banks do not have thatstructure for their U.S. operations.
The new structure will be held to the same leverage andcapital risk-based rules as U.S. banks, and will be subject toother Fed requirements such as stress-testing.
Gallagher said the plan is flawed because U.S.-basedbrokerages that are already regulated by the SEC will be sweptup into the new holding company structures - and would then fallunder Fed regulation.
U.S. broker dealers and banks are regulated under verydifferent types of regimes. Although both entities are subjectto capital requirements, the rules for banks are designed toreduce risk, protect against losses and improve safety andsoundness.
Net capital rules for brokerages, however, are more gearedtoward risk-management, so that if a brokerage fails, it can beliquidated and customers' money can be transferred to anotherfirm.
Gallagher said Monday he is also concerned that under theFed's rules, some brokerages would be subject to an additional 2percent leverage buffer on top of the 3 percent that is mandatedby the Basel III capital rules.
"This will incentivize broker-dealers within bank holdingcompanies to reduce the size of their balance sheets," he added.
"Specifically, it could induce broker-dealers to reduce theamount of highly leveraged but low return transactions in whichthey engage - most importantly, repo and stock loan activity."
Barclays (BARC)
