MFA Criticizes Regulators' ''Stay'' Initiatives Following Bank Insolvency
Commentary by Steven Lofchie
The MFA published a white paper, arguing that current G-20 bank regulators are not "adequately consulting with relevant policymakers" in their initiatives to restrict or "stay" end-users' default rights against distressed big banks in the regulators' response to recommendations made by the Financial Stability Board ("FSB").
The MFA expressed its concerns that: (i) the FSB and G-20 bank regulators are advancing their insolvency initiatives "without a mandate from public policymakers"; (ii) the G-20 bank regulators' new resolution strategies have "potential flaws and unintended consequences"; (iii) the contractual approach to imposing the Regulators' Stay Initiatives is "inherently flawed"; and (iv) the U.S. regulators' cross-default stay initiative is "not a G-20 objective and is inconsistent with congressional intent."
The MFA called on IOSCO to: (i) "prepare a report for G-20 legislators on the potential impact of the Regulators' Stay Initiatives on end-users and financial markets more broadly" and (ii) "analyze the implications of pursuing a contract-based approach to imposing the Regulators' Stay Initiatives." The MFA also recommended that the U.S. President's Working Group for Financial Markets should reconvene to consider the findings of IOSCO's report" and "make recommendations to Congress for their implementation" accordingly. Finally, the MFA requested that the G-20 bank regulators defer further action on their respective initiatives until after such an IOSCO report is published.
Commentary
Leaving aside the issue of whether the stay initiatives are good policy for the markets overall, the MFA raises two interesting questions: (i) are the regulators overreaching by (essentially) attempting to amend the U.S. Bankruptcy Code by regulatory fiat?; and (ii) are bank regulators' favoring the entities that they directly regulate (i.e., banks) over market participants generally (i.e., including the buy side). Neither the policy question, nor the questions as to the authority and the interests of the bank regulators, are easy ones to answer.