Yellen letter ups stakes for bank regulation

While the sternly-worded letter sent from the vice chair of the US House Financial Services Committee to Janet Yellen - head of the Federal Reserve - was unusual, it was far from unprecedented.

In the letter, released late last week, Patrick McHenry said he wanted the Fed to cease “all attempts to negotiate binding standards burdening American business until President Trump has had the opportunity to nominate and appoint officials that prioritise America's best interests".

According to Kevin Nixon, Global & Asia-Pacific Lead, Deloitte Centre for Regulatory Strategy, this very strong statement underscores the pent up frustrations by some in Congress who don't like US regulators dealing with “global bureaucrats in foreign lands".

“There have been several Republican congressional speeches, and media releases that talk about the faceless people in Basel who think they can tell American regulators what to do," he said. “It’s no secret that they have been frustrated with Dodd Frank for six years. So, there is a lot of built up tension before a new president even walks into the room.”

Three years ago, he went on to say, Republicans tried to stop the head of the Federal Insurance Office from going to international meetings as they disliked the global rules on insurance and asset management.

“So, this sort of response to a regulatory agency is not new for this group of people in Congress.”

And while it might be great political capital to label Basel Committee members as a group of faceless people closeted away in the Swiss Alps making rules that bind the average American, Nixon argued that this view of Basel is not true since the US regulators chair many of the working groups.

“The US is absolutely influential in any of these working groups and it’s all by consensus. Nothing gets agreed to at Basel that the US doesn’t agree to," he added.

Rocky road ahead

To Nixon, the issue here is not just about one letter being sent from one congressman to a regulator. What this letter signals is that Basel might have a very rocky road ahead.

While the market’s focus right now is on Dodd Frank, the bigger story is what happens to Basel and the G20 – especially for Australian banks.

“If the US regulators walk away from Basel or the G20 what does that mean for the international comparability of banking regulation? Currently countries do have different rules but what if these rules are vastly different, rather than slightly different," he said.

At the heart of harmonization is the prospect of another financial meltdown. “What happens if there is another crisis - which is what regulators are thinking about right now.”

According to the financial adviser, a consequence of the G20 was the creation of crisis management groups which met regularly.

“The idea was if another big bank got into trouble all the regulators would sit down and work out what was to be done having already discussed options," he explained.

“How do how do you achieve this if people either refuse to attend international meeting or come along but refuse to listen to what everyone else has to say?"

For Australia’s banks, these developments may well have a bigger impact than any changes to Dodd Frank.

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