Senator Presses Regulators to Revoke Exemption that Puts Taxpayer Funds at Risk

Senator Elizabeth Warren asked federal banking regulators to revoke their decision to provide a special exemption that allowed a bank to use taxpayer-insured deposits to subsidize risky European trading activities.

In a letter to the Federal Reserve, the Comptroller of the Currency and the FDIC, Senator Warren argued the exemption from Federal Reserve Act Section 23A ("Reg. W: Transactions between Member Banks and Their Affiliates") diverts deposits away from domestic lending and exposes the U.S. banking system to risks in European markets.

Senator Warren raised concerns about the Morgan Stanley restructuring, in which the bank's insured depository would acquire a European trading affiliate in a transaction that exceeds the limits allowed under Section 23A. She argued the exemption fails the statutory test, which requires the Fed and OCC to jointly find that a waiver is in the public interest and consistent with the purposes of Section 23A. She contended the agencies relied on Morgan Stanley's assertions about profitability, efficiency, cost savings and service to European customers - rationales she said that are not statutorily permitted grounds. Bringing the affiliate's trading and investment-banking activities into the insured bank, she wrote, could threaten safety and soundness and increase risk to the Deposit Insurance Fund. She also disputed an assertion made by Fed Vice Chair for Supervision Michelle W. Bowman that no U.S. bank has suffered material losses from such overseas activities.

Senator Warren asked the regulators to support their risk analysis. She said that if the agencies decline to reverse the exemption, future regulators would be responsible for requiring divestiture of the transferred assets. She requested answers to her questions by June 3.