October 18, 2017 / 4:26 PM / a year ago

Breakingviews - Global watchdogs may curb U.S. deregulatory push

WASHINGTON (Reuters Breakingviews) - Global bank watchdogs are acting as a line of defense against a U.S. deregulatory push. The U.S. Treasury Department will soon decide whether to recommend scrapping the post-crisis bank resolution regime, as some Republicans urge. But foreign regulators are threatening to impose new curbs on American firms if it’s ditched.

U.S. President Donald Trump (L) arrives with Treasury Secretary Steven Mnuchin prior to signing financial services executive orders at the Treasury Department in Washington, U.S., April 21, 2017. REUTERS/Kevin Lamarque

What’s known as orderly liquidation authority was established to avoid confusion if a complex financial institution fails, like Lehman Brothers did a decade ago. Dodd-Frank gave the Federal Deposit Insurance Corp the power to resolve bank holding companies, systemically important non-banks and other financial firms, and set up a fund to pay for the associated costs. The FDIC would initially borrow from the Treasury, and recoup the expenses with a fee imposed on big banks.

Some congressional Republicans decry this arrangement as another taxpayer-funded bailout. They have introduced bills to eliminate OLA and replace it with an improved bankruptcy code. The criticisms prompted President Donald Trump in April to order Treasury to review the OLA, and assess whether bankruptcy was a better method.

The U.S. debate ignores the global nature of big banks and the role international regulators play. The FDIC-supported method would resolve a firm at the holding company level, eliminating the need for each division - including overseas units - to have their own wind-down plans. Overseas watchdogs would defer to U.S. regulators and work in close cooperation with them. Bankruptcy judges don’t have those relationships and the process, even with improvements, would be too slow to handle the fast-paced chaos of a large, failing bank.

Overseas regulators have smartly worked to get ahead of the decision, warning that without OLA, U.S. banks’ overseas subsidiaries could be subject to higher capital requirements, restructuring and ringfencing. Wall Street also supports maintaining the liquidation authority. Despite Trump’s threats to gut Dodd-Frank, Steven Mnuchin’s Treasury Department so far has been level-headed in its recommendations for revising bank regulations and rules overseeing capital markets. The threat from global watchdogs is another reason to discount the odds of a major rollback of financial rules.


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