It what is widely seen as a correction of an oversight, the U.S. Federal Reserve is debating whether to allow foreign banks to avoid expensive regulation. The issue stems from an amendment to the Dodd-Frank Act named after Blanche Lincoln, a former U.S. Senator. The Lincoln amendment “prohibits banks that have access to US government-provided deposit insurance or Fed credit facilities from acting as derivatives dealers, on the basis that the taxpayer-provided safety net may subsidise such activities” (Financial Times).
Apparently legislators unwittingly extended the amendment to foreign banks. The question now is whether regulators will follow through by de-thorning this cross-border regulation.
Will the Fed Go Soft?
The amendment would force foreign banks to move their derivatives operations to affiliates outside the bank. According to the Financial Times, the Fed is considering US branches of foreign banks as “separate legal entities.”
The Fed’s decision has possible downsides. For one, it could lead to regulatory fragmentation for already under-resourced regulatory agencies. From Shahien Nasiripour:
The “separate entity doctrine” would call for the Fed to treat different branches of the same foreign banking group as distinct legal entities for the purposes of US regulations. For example, one branch of a foreign group could continue to enjoy access to the Fed’s discount window for emergency funding while another of its branches acts as a swap dealer.
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