Wow we really disagree. I think SIL is out of line totally. I think in the big picture of life the SIL needs to leave it alone.
But like I said you, not your wife needs to voice the concern. Talk to your brother. Tell him how it will affect your family relationship. Leave it alone then. See what happens. You may be in a tizzy for nothing.
Carrying your fathers name is a big issue. It would be to my brothers. It was assumed in my family that my older brother would name his son after our dads middle name. My younger brother had the son first and he didnt touch the name.
Godparents can be friends however it usually goes by ones faith. My kids godparents are my siblings, great aunts and uncles. Friends do no always remain the same.
I guess it is all wrapped up in culture.
Jessica is right. You cant get consumed by it. You will have to be the bigger people and get along if it happens. Eventually you will and need to let it go for many reasons.