Little noticed in the flurry of regulatory realignments since the election is the sea change coming for foreign financial institutions doing business in the United States. Caught in the complex confluence of foreign, trade, and financial policy, foreign entities and especially foreign banking organizations (FBOs) of any size face a new strategic reality. Now, trade in financial services will only be weaponized when other national-policy tools are deployed. However, the 2020 financial meltdown exposed weaknesses at parent companies the U.S. will no longer rely on home-country regulators or global negotiations to resolve.
First to FBOs. As we anticipated in our initial analyses of post-election financial policy, the Fed will move past the uneasy compromise that absolved big FBOs of U.S. liquidity regulation. As we have also noted, prime institutional MMFs have a systemic bull’s eye on their back. As Secretary Yellen confirmed earlier this week, FSOC has prioritized activity-and-practice rules for the asset-management sector. These will, though, take time and the Fed no longer wants to wait. In its final SIFI tailoring rule, it promised notice-and-comment before liquidity standards for FBOs are re-proposed. These are likely soon along with a new, harder look at consolidating FBO rules to cover branches and agencies.
And, extraterritoriality is back in a big way. This policy was Gary Gensler’s hallmark as CFTC chairman during the Obama Administration. He will bring it with him to the SEC and he won’t be alone among financial regulators looking again for U.S. standards as the guideposts to U.S. operation. The Fed will, as noted, take a harder line now and several possible candidates for Comptroller would do the same.
Fintech is also in the frying pan. The Wirecard scandal exposed not just terrible rifts in the EU regulatory construct that have long troubled the U.S., but also profound home-country lapses that put critical payment-system infrastructure at grave risk. The new, harder look at fintech “partnerships” with insured depositories we previously forecast will be particularly painful for foreign fintechs and those looking for direct entry should expect ring-fencing.
BigTech is under even more scrutiny than fintech. If Rakuten gets the FDIC go-ahead for an ILC – a big if – FSOC would also certainly step in. Its ability to declare the parent company a nonbank SIFI is tricky due to cross-border barriers to regulation and the online merchant’s overall business model, but FSOC can and almost certainly will make life very different and difficult for a Rakuten bank. Ant, were it ever to begin to act on its U.S. ambitions, would encounter systemic obstacles at least as high due not just to its size and scope, but also sour relations between the U.S. and its home port of call.
None of these moves will be meant as protectionist, with the possible exception of those aimed at China. Instead, some will be renewed battles by regulators who lost the first time around, battles in which combatants feel better armed in the wake of the pandemic’s hard lessons. Others will be efforts by Biden officials to reinstate Obama policies either reversed under Mr. Trump or ignored for the past four years. Regardless, all will be more than consequential.