The U.S. and Global Banking: Collaboration or Imperialism?

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On both sides of the Atlantic, there is agreement on a broad, sweeping power for U.S. banking regulators: the ability to break apart a failing, global bank. Bloomberg today reported that regulators in the U.S. and the U.K. are in agreement on the U.S. government’s authority in such cases to step in, and take control. The Federal Deposit Insurance Corp. (or FDIC) is expected to release a plan, outlining how the liquidation process would work.

Power granting the U.S. this authority is found in the 2010 legislative behemoth, the Dodd-Frank Act. A provision within the act requires banks to have a “Living Will,” a plan in place for how the bank would safely file for bankruptcy. The FDIC and Federal Reserve remain the final arbiters, and if a bank’s plan is not up to snuff, the government entities can require the bank undergo restructuring.

It is all part of the on-going effort to end the “too big to fail” mentality, which has broad agreement across the banking industry as well as government. Speaking to Bloomberg, JPMorgan (NYSE:JPM) CEO Jamie Dimon said that everyone was aware of the need “to eliminate too big to fail.” Also discussing the matter with Bloomberg was Anshu Jain — Co-CEO of Deutsche Bank AG – who stated that to address the situation and ensure people continue to trust the banks, “We need regulators. We need countries to sit down and work out the very complex legal framework.”

But is this how U.S. regulators will be viewed, as collaborators on an international issue, or does the announcement reek of imperial, protectionist policies? In September, Bloomberg reported on a similar issue, the US wanting assurance that international banks operating in the U.S. had enough ready capital in case of a crisis.

To address this, Daniel Tarullo, who serves on the Board of Governors of the Federal Reserve, drafted a rule last December to require the U.S.-based branch of foreign commercial or investment banks to have more than enough assets handy to cover liabilities.

It was a proposal that received backlash from Michel Barnier, the European Union commissioner in charge of financial services. In a letter published by Financial News, Barnier wrote to Fed Chairman Ben Bernanke to express his displeasure with how the U.S. was proceeding. Barnier said, “I believe that, even though regulation remains first and foremost the responsibility of national regulators, the global nature of financial markets and the lessons drawn from the recent crisis clearly call for a globally-coordinated response.”

Only by working together, Barnier believes, can the global banking community create cohesion in regulation, preferable to the “‘territorial’” approach the U.S. was pursuing with Tarullo’s rule. Even U.K. officials who agree to the U.S. authority over banks want a quid pro quo. Paul Tucker, the Bank of England’s Deputy Governor acknowledged to Bloomberg the U.K. would step aside if the U.S. took over a U.S. bank that also operated in the U.K., but a “reciprocal agreement from United States authorities” was necessary.

How the proposed plan by the FDIC will be received by the international community remains to be seen. The more countries that react in an England-esque manner, requiring only corresponding respect, the easier time the plan will have on the international stage. If Barnier and the European Union bristle again at what they perceive as a lack of trust for foreign regulators, the path to reform in global banking may be tainted by trappings of banking imperialism.

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