Speaking on international financial regulatory reform, Federal Reserve Governor Jerome Powell said the greatest challenge for the resolution of a global bank is that various local jurisdictions may take actions that would endanger the overall resolution.
“Creditors and counterparties of solvent operating subsidiaries might rush for the exit if they are unsure of their status,” Powell said. “As a subsidiary comes under increasing stress, authorities might preemptively ring-fence local assets. The process of resolution will need to be fully worked out and understood beforehand by market participants, regulatory authorities, and the general public. It will be absolutely essential to build trust among all parties, and especially between regulatory authorities.”
Powell said reaching an agreement on cross-border resolution will be a challenging one.
“Our financial services industries and our economies differ in many ways,” Powell said. “But we have a shared interest in financial stability, in reducing moral hazard, and in protecting taxpayers.
Powell said the Fed’s proposal for oversight of foreign bank involves a set of adjustments intended to reduce the risks posed to the American financial system by the U.S. operations of large foreign banks. The proposal is part of a wider set of reforms that enhance banking standards in the U.S. and somewhat follows the example put forth by the EU and its member states.
“We believe that our foreign bank proposal, which would increase the strength and resiliency of the U.S. operations of these firms, would meaningfully reduce the likelihood of disruptive ring-fencing at the moment of crisis that could undermine an SPOE resolution of a large foreign bank,” Powell said. “We are fully committed to the international efforts to address cross-border resolution issues and to maintaining strong cooperation between home and host supervisors during normal and crisis periods.”