Financial regulation has been in the news recently, in big and small ways.
As part of the Dodd-Frank financial regulation act from 2010, a Financial Stability Oversight Council (FSOC) was established. A key responsibility was to designate institutions as “systemically important financial institutions” (SIFI), resulting in stricter regulations and higher capital requirements. This is a simple way to make the financial system safer. More capital means being able to weather a storm, when it comes (not if). Having financial assets over a certain amount automatically designates institutions as SIFI, but there is a class of other institutions that FSOC may decide qualifies as well.
Metlife, the insurance company, had received this designation. They appealed, and a judge agreed with them. That a judge could undermine a key regulatory capacity of Dodd-Frank is a little frightening. The Treasury Department is appealing the decision.
The New York Times notes:
It is unclear how the ruling may affect the other three nonbank companies that regulators have designated as “systemically important”: the American International Group, Prudential Financial and General Electric’s financing arm.
This could have ripple effects and water down Dodd-Frank’s effectiveness. The systemically important tag was a primary reason GE decided to become an industrial company again and sell off GE Capital, rather than be weighed by considerable financial risk moving forward. This is the downside of having a law that empowers regulators and committees to make rules, rather than have the rules enshrined in the law itself.
As the Treasury Department prepares their appeal, they have been busy in other ways as well.
Coming off Pfizer’s $160 bn attempt to relocate its headquarters overseas by merging with Allergan, the U.S. Treasury Department announced rules to further stop “inversions”. The details are difficult to understand, and could be reversed, absent legislation, in the next presidential administration. But the effect was immediate, with Pfizer calling off the merger, resulting in a $400 mn penalty.
Finally, I couldn’t talk about tax avoidance without talking about The Panama Papers, leaked documents from a Panama law firm specializing in individual tax avoidance. The fallout has been significant. Among other things, the rulers of China who had wanted to spearhead a crackdown on corruption turned out to have family members named in the papers, and censors have blocked many western media outlets.
One step back, two steps forward.