State aid, Brexit’s impact on Mifid, and the Fed embattled

The week in, February 10-16 2017


STATE AID dispute continues in EU

FED pushes back regulatory freeze

BREXIT promises problems for Mifid implementation


COMMENTARY:  The Fed under pressure

The new US administration has faced opposition from several quarters. Some of it has been routine – the Democratic opposition in the Senate and House of Representatives. Some of it has been more unusual – the constant flow of leaks about possible links with the Russian government and intelligence agencies. And some has been downright surprising – ‘rogue’ Twitter accounts from such unlikely hotbeds of resistance as the National Parks Service. The latest has been a very public dispute between Janet Yellen’s Federal Reserve Board and a suspicious and hostile administration.

The Fed and other state and federal insurance regulators made their position clear shortly after last year’s election, with a ‘united front’ statement at the Insurance Risk North America event in New York emphasising the importance of active regulation and international co-operation. They have come under pressure in both areas since then. Efforts to impose an unprecedented “one in, two out” rule on all new regulations from federal agencies ran into interpretation problems last week; for example, if a regulation is amended, does that count as issuing a new regulation? In that case, is the old regulation supposed to have been discarded, helping the new regulation meet its “two out” target? If the new rule actually reduces overall regulatory burden, does it still count? In any case, experts told, the rule is unenforceable on independent agencies such as the Fed and its sister regulators – as is an earlier attempt to freeze all issuance of new regulation until the new administration has its people in place, which the Fed and other regulators have ignored.

And Yellen herself continues to face attack from legislators critical of her suspicious desire to discuss international accounting rules with people from other countries. Patrick McHenry, Republican vice-chair of the House Financial Services Committee, warned her in a letter on January 31 that it was “unacceptable” for the Fed to participate “in international forums on financial regulation” and to negotiate regulatory standards “among global bureaucrats in foreign lands”, and suggested the US should withdraw from the “secretive structures” of the Financial Stability Board, the Basel Committee on Banking Supervision and other international regulatory groups unless it received a “comprehensive review of past agreements that unfairly penalised the American financial system”.

In a reply on February 10 Yellen declined to do so, and clashed again with McHenry this week, reminding him that the Fed and other regulators had a legal obligation to continue to issue regulations and a duty to continue discussions with their counterparts abroad.

Clashes are likely to continue over the administration’s plans to repeal much of the Dodd-Frank Act – legislation that Yellen has also defended as necessary for a stable financial sector. Last week also saw the news that  Fed board member Daniel Tarullo would step down in April; he praised Yellen by name in an otherwise unusually brief letter of resignation. This leaves four seats on the Fed board now vacant, but Yellen has insisted that she will serve out her term as a governor even if the administration names a new chair. Both sides are digging in for a far from peaceful summer.



Deutsche Bank paid a $7.2 billion settlement after the US Department of Justice concluded it had based mortgage-backed securities on poor-quality underlying assets, and deliberately failed to conduct proper due diligence on most of them. Credit Suisse paid a total of $5.3 billion for similar offences.



“[Making derivative books comply with ring-fencing] is a material consideration because what you have got is thousands of bilateral arrangements, and you would need the agreement of the third party to move each of them. That takes a significant amount of time unless you can do it by some act of parliament or some kind of statutory facility” – Mark Penney, HSBC

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