Senator Elizabeth Warren Demands Revocation of Morgan Stanley Exemption
Senator Elizabeth Warren, D-MA, demanded Wednesday that three regulators revoke their approval of an exemption that allows Morgan Stanley to incorporate its German investment bank into its holding company.
Analysis of the Exemption
Warren pointed out that the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. provided no analysis or evidence to support the conclusion that the exemption is in the public interest and is consistent with the intent of Section 23A of the Federal Reserve Act.
History of the Federal Reserve Act
Congress amended the Federal Reserve Act in 1933 to prevent banks from using their access to a federal safety net to subsidize the nonbank activities of affiliates, Warren argued.
Morgan Stanley’s German Unit
Morgan Stanley’s German unit is primarily engaged in sales and trading of fixed income and equity products, investment banking, capital markets, and research, according to a Fed employee’s description of the business.
Concerns Raised by Senator Warren
Warren expressed concerns that Morgan Stanley’s restructuring aims to fund the affiliate’s existing business with cheaper federally insured deposits, diverting deposits away from domestic lending for businesses and households in the United States and needlessly exposing the country’s banking system to risks in European financial markets.
Request for Explanation
Warren asked the Fed and OCC to explain why they believe it’s in the public interest to let Morgan Stanley boost its profitability while increasing risk to the U.S. banking system. She also inquired whether U.S. customers will receive improved banking products and services through the exemption.
Unprecedented Gravity of the Exemption
Warren highlighted the unprecedented nature of the exemption request, noting past instances where similar restructurings led to heavy losses, such as the Citi and JPMorgan cases.
Failure of Morgan Stanley’s Exemption
Warren argued that Morgan Stanley’s exemption fails in two ways: the restructuring doesn’t appear to be in the public interest, and by extending the federal safety net to a nonbank affiliate, the transaction is opposed to the purpose of Section 23A.
Call to Action
Warren urged regulators to provide copies of any Section 23A waiver applications received since the start of the second Trump administration. She also warned that if the agencies refuse to reverse the unlawful exemption, future regulators would need to correct the error and require divestiture of the transferred assets and liabilities out of the bank.
Conclusion
Senator Elizabeth Warren’s demand for the revocation of Morgan Stanley’s exemption raises important concerns about the potential risks to the U.S. banking system and the need to prioritize the public interest over profitability. It serves as a reminder of the importance of regulatory oversight in safeguarding the stability of financial institutions.
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