Fed Saps Wall Street Hopes for Trading Revival
Don't get fooled by the coming Wall Street head fake.</br></br>Even as market conditions appear to be more favorable for the trading operations of big Wall Street banks, the weight of regulation will continue to be a drag on the business.</br></br>Daniel Tarullo, the Federal Reserve governor who serves as the central bank's point person on regulation, told the Senate Banking Committee Tuesday that regulators are crafting rules that would require banks to finance their short-term securities lending with a significant amount of stable funding. And customers such as hedge funds would be required to post collateral meeting regulatory minimums.</br></br>The combined effect would be akin to a tax on leveraged trading, making it more expensive for banks to provide short-term credit to the customers of their trading desks. The very likely result is a long-term reduction in trading activity and slimmer profits.</br></br>Mr. Tarullo also outlined Fed plans to impose a risk-based capital surcharge on the most systemically important banks. Importantly, that will penalize reliance on short-term funding that the Fed considers vulnerable to runs.