Earlier this week, FedFin hosted several groups of foreign bankers in Washington in what I suspect was a largely fruitless effort to figure out U.S. policy. We did our best to help, but for all the certainty the Fed tries to instill into its foreign banking organization (FBO) rules, every day is more than different down Pennsylvania Avenue at the White House. Will the G7 today turn into a G6 or maybe a G8 with Russia back in or maybe a G0 with nobody in and the U.S. totally out? A G2 with just the U.S and North Korea? I know I don’t know whether the group of heads of state know, but I do know that all of this chaos combined with a little-noticed provision in new law spells serious trouble for global cross-border financial regulation.
In the most immediate terms, this means the odds of U.S. appointees to head the Financial Stability Board or pretty much anything else are out. The FRB, OCC, FDIC, SEC, and CFTC are indeed independent agencies (albeit with varying degrees of policy freedom). However, I have found that we need to explain this every time to global executives and central bankers. This is not only due to very different governance structures back home, but also and not unreasonably due to a good deal of skepticism that political appointees are always all that independent. Surely, if it came to siding with the U.S. President or foreign government agencies, U.S. regulators would at the least find themselves conflicted.
Secondly, foreign financial institution M&A in the U.S. just got a whole lot more complicated. As a result, potential foreign acquirers of U.S. financial or fintech institutions need to consider the transaction very carefully and very quietly well ahead of time to go far beyond the usual law-firm assessments and investment-bank enthusiasm. Each deal of size and even some small ones will raise new political, trade-policy, and foreign-relations questions. I think most of these can be well-handled to protect even high-profile transactions, but ignoring the new U.S. trade-in-financial-services reality will put once-routine transactions in harm’s way absent careful, politically-astute advance planning.
Third, the outlook for bonhomie is particularly problematic for cross-border insurers. As our analysis of the new law demonstrates, Congress took a hatchet to the ability of U.S. regulators to work with their global colleagues on insurance capital, resolution, and holding-company standards. Even the President protests aspects of this new policy, although only on grounds that it constrains his power, not that Mr. Trump disagrees with the new law. The new construct means that state insurance regulators reign supreme and global life-insurance companies face new barriers to entry and subsidiarization demands that may well undercut core franchise-value strategies.
Although we anticipated much of this, times are now even tougher for cross-border finance. An atmosphere of vigorous, if unpredictable, protectionism in concert with poisonous personal attacks on foreign leaders of our closest allies will surely embitter trade-in-financial-services transactions even though none now is a top priority political target. Not turning into one is now the key to effective U.S. strategy for foreign financial institutions.