How Foreigners Became America’s Financial Regulators

Mark Carney, governor of the Bank of England and 
chairman of the Financial Stability Board 
Photo: Bloomberg

The Fed and Treasury are answering to a board of the G-20 without admitting it to the American people.

At a hearing before the House Financial Services Committee on Tuesday, Treasury Secretary Jack Lew denied that the decisions of the Financial Stability Board—an international body of financial regulators—were binding on its member nations, which include the United States. Chairman Jeb Hensarling asked him why, then, did the FSB need to give three Chinese banks “exemptions” from its “nonbinding” rules. Mr. Lew was unable to explain.

Treasury Secretary Jack Lew

This exchange may not seem to have much practical significance. But it does. The authority of this board should be of pressing concern to Congress and the American public, both for its effect on the U.S. financial system and more so on the power of Congress under the U.S. Constitution.

In 2009 President Obama and the leaders of the G-20 countries deputized the Financial Stability Board to reform the international financial system. The Treasury Department, Federal Reserve and Securities and Exchange Commission are the board’s U.S. members.

The FSB has since adopted policies that could substantially change the U.S. financial system. In 2013 the board declared that any financial intermediary not regulated as a bank is part of the “shadow banking system” and should be subject to bank-like prudential regulation in its home country. These include securities broker-dealers, finance companies, asset managers and investment funds such as hedge funds. The three U.S. members of the FSB concurred in these decisions—and the Fed already is leading an effort to subject the shadow-banking system to such regulation.

The FSB’s 2013 declaration also made it clear that even small nonbank firms can create systemic risk by participating in “a complex chain of transactions, in which leverage and maturity transformation occur in stages, and in ways that create multiple forms of feedback into the regulated banking system.”

While the language is obscure, it strongly suggests that routine transactions in the capital markets—like short-term financing of long-term assets—can be deemed to create systemic risks even when they are carried out by firms that are not themselves of sufficient size to threaten systemic effects

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