U.S. regulators worried that banks and brokerage firms remain too dependent on risky types of short-term funding are weighing new rules designed to reduce reliance on parts of what is often called the shadow banking system.
Now the SEC is weighing new funding rules for brokers as well as a limit on leverage similar to those used by the Federal Reserve and other regulators for banks, according to a regulatory document and SEC officials familiar with the matter.
One measure of a broker’s indebtedness is the ratio of its assets to capital. U.S. broker-dealer leverage reached 40-to-1 in 2007 before falling to 22-to-1 in 2012, according to the most recent annual report of the Financial Stability Oversight Council (FSOC), an umbrella group of U.S. regulators led by the Treasury Secretary. Broker-dealers’ leverage is still “significantly higher” than that of commercial banks, according to FSOC.
Brokers contend that their borrowing is generally less risky than bank lending. Repo borrowing, for instance, is backed by collateral that can be readily sold to raise cash in case the other party defaults, said Steven Lofchie, co-chairman of the financial services group at Cadwalader, Wickersham & Taft LLP.