In this report, we analyze the letters filed to date by state and foreign-government officials with the FRB on the foreign banking organization (FBO) rule (see FSM Report SYSTEMIC64). We focused on these letters, not the many from the industry or advocacy groups, because these are always given very careful consideration by U.S. regulators and the Treasury in hopes of avoiding confrontations with officials with considerable authority over U.S. firms operating within their borders. However, Treasury Secretary Lew, in a recent statement on extraterritorial derivatives rules, showed himself remarkably unsympathetic to foreign-government complaints over the CFTC proposal, essentially saying these governments did not understand the U.S. “process.” Whether the FRB is similarly unmoved by comments remains to be seen, although Friday’s speech by Gov. Tarullo – the NPR’s principal advocate – pushing for even tougher capital and liquidity standards in the U.S. is not, we think, an encouraging sign to those hoping for a relaxed final rule. Of most note is the threat – clear and implied – that foreign governments will in fact retaliate against U.S. financial institutions should the FRB proceed. Comments also make clear how complex efforts are to craft cross-border resolution protocols, with several foreign agencies objecting to the FRB proposal on grounds that it violates their own resolution protocols. We do not expect a final rule before the fall, likely after the head-of-state G-20 meeting in September this year.
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