The Commodity Futures Trading Commission (CFTC) is pushing for new regulations that would affect the way American based banks are allowed to operate overseas. The plan was formulated in the middle of last year and is now working its way into the banking world’s consciousness. In short, the new regulations would require both American banks that operate overseas and non-American banks that deal in a certain volume of derivatives to comply with certain standards.
At the crux of the debate are events like JPMorgan Chase & Co. (NYSE:JPM)‘s London Whale. That debacle was a result of trading that occurred in the bank’s London office, but defendants of the new regulations argue that any such failures would still affect the U.S. JPMorgan Chase & Co. (NYSE:JPM) is insured by the FDIC, for instance, and its failure could hurt ordinary taxpayers.
The argument against the new regulation is that banks operating overseas could be caught in a system where they have multiple levels of conflicting regulation. That could lead those banks to close U.S. offices and find home elsewhere, or cover the extra costs of regulation by charging everyday Americans more.
Why we should support regulation
This isn’t a clear-cut problem, and banks like UBS AG (ADR) (NYSE:UBS) have pointed out that apart from regulatory hassles, the new requirements could pose data privacy issues, as well. But those issues can be overcome with both time and resources, and any bank committed to serving its customers in the U.S. should be able to find ways to make it work. If they can turn zero-down, high risk mortgages into AAA rated instruments, they can figure this stuff out.
The premise for the new regulations is a portion of the Dodd-Frank Act which exempts foreign banking operations unless they “have a direct and significant connection with activities in, or effect on, commerce of the United States.” Taking the London Whale as a test case, the JPMorgan Chase & Co. (NYSE:JPM)’s stock crashed 25% in the months after the trading losses came to light, putting investors and taxpayers at risk.
That risk is exactly what the CFTC is trying to mitigate. While the risk of investing in a bank — or any company — should be assumed by the investor, the risk of a company’s failure affecting ordinary citizens should be minimized. The balance between ease of use and economic safety must be heavily weighted on the side of safety.