SIFMA Urges Banking Regulators Not to Require Enhanced Resolution Requirements for Broker-Dealer LBOs
Commentary by Steven Lofchie
In response to an Advance Noticed of Proposed Rulemaking ("ANPR") that would add "an extra layer of loss-absorbing capacity" in resolving certain large banking organizations, SIFMA said that it is both unnecessary and inappropriate to extend the enhanced resolution requirements for global systemically important banks ("GSIBs") to non-GSIB large banking organizations ("LBOs") whose primary operations are as retail broker-dealers.
SIFMA said that the business models of many non-GSIB LBOs operating as retail broker-dealers present minimal credit risk and can easily be resolved under existing frameworks. Unlike GSIBs that provide institutional broker-dealer services, SIFMA said that non-GSIB LBOs mainly facilitate simple, low-risk transactions. SIFMA also said that non-GSIB LBOs typically have limited connections to other financial institutions, making them easier to sell or to liquidate pursuant to the Securities Investment Protection Act without the need for additional resolution protections. SIFMA asserted that it is unnecessary to impose additional requirements on holding company subsidiaries of GSIB and non-GSIB Foreign Banking Organizations, arguing that the protections currently in place are more than sufficient.
SIFMA encouraged the FDIC and the Federal Reserve Board to consider models that determine an LBO's eligibility to be excluded from enhanced requirements based on (i) the percentage of risk-weighted assets to total consolidated assets or (ii) the composition of a firm's assets and liabilities. SIFMA also urged the banking regulators to conduct a study on retail broker-dealer business models to better understand them and their credit risk.
Commentary
The banking regulators seem to materially misunderstand and overestimate the credit risk in a retail broker-dealer business. SEA Rule 15c3-3 ("Customer protection-reserves and custody of securities"), which imposes strict segregation rules as to the custody of customer assets, combined with the SEC's very conservative net capital rule, SEA Rule 15c3-1 ("Net capital requirements for brokers or dealers"), dictates that retail broker-dealers have a very low risk credit profile. Banks, which can make unsecured loans and hold illiquid loans as assets, have many times the inherent credit risk than do retail broker-dealers. SIFMA's suggestion that the banking regulators develop a better understanding of the regulatory framework to which broker-dealers are subject is right on point.