Feds want to put the brakes on foreign exchanges.
The Fed and Treasury have been pushing to impose a global moratorium on currency swaps.
They want to avoid a repeat of the 2008 financial crisis, which caused a $200 trillion spike in the value of US Treasury bills and the collapse of US stocks and bond yields.
In the past week, Treasury Secretary Steven Mnuchin has called the proposed ban “one of the toughest” he’s seen.
The proposal to impose the global ban was backed by a bipartisan group of lawmakers in the Senate Banking Committee.
But the Fed has been reluctant to impose this kind of a global rule.
Some in the financial services industry are already complaining that the Fed would have the power to stop any financial institution from doing business with a foreign currency swap.
The issue is so contentious, even some of the country’s top banking regulators are split on the issue.
“The question of whether the Fed should be able to impose its own currency restrictions is an issue that should be explored,” Barry Ritholtz, a professor at Georgetown University’s University of Virginia Law School, told Bloomberg Businessweek.
“The Fed would be violating the principle of separation of powers.”
“That’s a very strong concern, because there’s no doubt that the central bank can intervene to protect itself.”
The Fed has already intervened in foreign currency markets when it intervened to stabilize the currencies of Argentina and Brazil in the early 2000s.
But this would be the first time it has done so in a foreign exchange market.
There’s a difference between currency restrictions and a ban.
Currency restrictions would stop foreign exchange transactions.
But a ban would force financial institutions to move funds from their US dollars to foreign currencies.
While the Fed and the Treasury have not ruled out this possibility, it’s not something the Fed is willing to do right now.
The US Treasury says the ban would help prevent a repeat and could be “necessary to prevent the risk of a significant financial contagion.”
That’s the argument from a group of former Treasury secretaries, including former Treasury Secretary Hank Paulson, who called the plan to ban swaps “one-sided.”
In a blog post on Thursday, Paulson said the ban could help curb a financial crisis that was sparked by the 2008 crisis.
“If you want to stop a financial collapse in the United States, it must be done by the Fed,” Paulson wrote.
“But to do so, it is important that the Federal Reserve be able and willing to impose restrictions that help prevent financial contagions and other harmful effects on the financial system.”
Paulson said that the ban was a necessary step.
“I don’t believe the Fed ought to be able in this case to stop trading in foreign currencies in the US.
I don’t think it should be allowed to, either,” he wrote.
Mnuchin told reporters on Friday that the proposed global ban would not prevent US banks from doing their business in other currencies, such as the Japanese yen, or prevent foreign exchange companies from selling US dollar futures contracts.
In addition, the Treasury said the proposed plan would not restrict the US Treasury from issuing its own notes or bonds.
A Treasury spokesperson said the proposal would allow the Fed to act “with the full force of the law” to limit the risk posed by foreign exchange trading.
We have to make sure that we have the best tools in the toolbox, Mnuchin said.
On Monday, a group representing big financial firms called the Financial Stability Oversight Council (FSOC) urged the Fed not to take action.
FSOC said it was “extremely concerned” about the proposal.
Earlier this week, the US Justice Department and the Securities and Exchange Commission sent letters to the Treasury asking the agency not to impose any ban on trading in US currency.
What does the ban on foreign exchange swaps look like?
The Federal Reserve says it would impose a ban on any financial firm that trades with foreign currencies or with an agency that does business in a country with which the US has an agreement to do business, like the Bank of Japan.
The letter, which was sent on Thursday to the US Bank for International Settlements, asks that the BIS not allow any financial company to trade in yen or yen-denominated contracts with the Fed or the BIC.
If the Fed were to enforce the ban, it would create a risk of “serious financial contagiation,” said FSB Chief Economist Alexander Klimov, in a statement.
Will foreign exchanges become a problem?
A ban would be “an important tool to stop financial contagiousness,” said Kevin M. Williamson, the former Federal Reserve Governor, who served as chairman of the Financial Crisis Inquiry Commission.
Should the US ban foreign exchanges, will other countries ban them?
Foreign exchange trading is not a big issue.
It has been in place