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Gallagher Concerned Over the Role of International Financial Regulators

In How Foreigners Became America’s Financial Regulators, a provocatively-titled piece for the Wall Street Journal, SEC Commissioner Daniel Gallagher and Peter Wallison examine the role of the Financial Stability Board in international financial regulation. The article highlights a recent memorandum from the chair of the FSB to constituent members that calls for “[f]ull, consistent and prompt implementation” of FSB reforms. The pair was unswayed by recent testimony by Secretary of the Treasury Jack Lew before the House Financial Services Committee in which Lew denied that FSB decisions were binding on member nations. For support, they pointed to what they describe as Lew’s inability to explain why the FSB needed to grant certain Chinese banks “exemptions” from the FSB’s rules.

Gallagher and Wallison contend that binding nature of the FSB’s mandates can explain the actions of the FSOC over the past year, saying “[i]n every case where the FSB made a decision or announced a policy, the FSOC followed.” The article points to the FSOC’s designation of four non-bank institutions as systemically important, as well as the FSOC’s argument that asset managers and the “shadow banking” system could be subject to prudential regulation. Each of these instances, the article posits, was mapped out for the FSOC by previous FSB action. From this, Gallagher and Wallison, draw the conclusion that the FSB’s decisions are binding on U.S. agencies. They argue that such influence sets a “dangerous precedent” that, if let stand, “would unravel the separation of powers and the role of Congress in the U.S. constitutional system.”