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Delivered daily by 8 a.m., Morning Money examines the latest news in finance politics and policy. | | | | |  | | By Zachary Warmbrodt | Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro.Washington’s financial policy bubble is preoccupied with crypto. But a far more consequential regulatory battle is brewing just below the headlines. The looming fight is over bank capital — the tool regulators use to ensure lenders have enough of a funding buffer to sustain operations during bad times. It can be more complex than blockchain, and getting it right has huge ramifications for the economy. It requires officials to strike a balance between averting the next financial crisis — which could be triggered by a proverbial unknown unknown — while not limiting banks so much that it holds back growth. “Every decision a bank makes first factors capital costs or benefits,” Federal Financial Analytics managing partner Karen Petrou wrote earlier this month. That’s why the biggest banks in the U.S. have started to mobilize their lobbyists and trade groups to try to head off what could be a significant increase in capital requirements. Wall Street giants are on alert because of Fed Vice Chair for Supervision Michael Barr, President Joe Biden’s pick to serve as the central bank’s pointman on regulation. Before Barr was confirmed, the Fed and other banking agencies were already working to finalize unfinished post-2008 capital rules from the Basel Committee. Then Barr upped the ante when he announced a “holistic” review of all the capital regulations imposed on banks since the global financial crisis. Barr says capital levels are “strong.” But he triggered the banks when he indicated that U.S. requirements may nonetheless be too low. Industry representatives argue that Barr’s rationale for potentially hiking bank capital is flawed and that the review process has been opaque. Some say privately that his push is politically motivated. The Financial Services Forum, the Bank Policy Institute and the Securities Industry and Financial Markets Association have started to pump out blog posts making the case that higher requirements would be a drag on the economy and force banks to retrench in the capital markets — ceding more ground to less-regulated financial institutions derided as “shadow banks.” “Nothing really suggests that we need to impose additional capital requirements on the system and on the largest banks in particular,” Financial Services Forum CEO Kevin Fromer, who represents the chief executives of eight U.S. megabanks, told MM. House Republicans are joining the fight, even as they beat up on the big banks for “woke” social agendas. Rep. Andy Barr, who chairs the subcommittee overseeing bank regulators, told MM that he will conduct “vigorous oversight” of the Fed’s capital review. “I am particularly focused on preventing regulators from imposing excessive requirements that would sideline capital as we continue to battle forty-year high inflation,” Barr said. On Capitol Hill, BPI says it has already done “a lot of meetings.” The group is hosting a capital symposium in Washington next month featuring JPMorgan Chase CFO Jeremy Barnum and former Fed Vice Chair Donald Kohn. But bank reps struggle to speculate on where regulators may land, and so they’re preparing for the worst. Regulators who might be inclined to raise capital levels would no doubt have political cover from some top Democrats like Senate Banking Chair Sherrod Brown and even from smaller banks. European regulators have also rejected banking industry claims that easing capital requirements would boost lending. “Instead of building up capital to withstand losses or investing in the real economy and workers, they’re spending billions in profits on stock buybacks and dividends,” Brown told MM. “Taxpayers shouldn’t be left holding the bag for Wall Street CEOs who put profits over working families.” Have a great week — What are we missing? Let us know. We’re zwarmbrodt@politico.com and ssutton@politico.com.
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The House is out. The Senate is in … Monday … Fed Governor Michelle Bowman speaks at an ABA conference in Florida at 8 a.m. … Treasury assistant secretary Joshua Frost is among the speakers at the CFTC’s Global Markets Advisory Committee meeting that starts at 9:30 a.m. … Tuesday … The Consumer Price Index for January is out at 8:30 a.m. … Senate Banking holds a hearing on the need for crypto safeguards at 10 a.m. ... Wednesday … Former Bank of England Governor Mark Carney is among the witnesses at a Senate Budget hearing on climate-related economic risks at 10 a.m. … Senate Finance considers Daniel Werfel’s IRS commissioner nomination at 10:30 a.m. … The Congressional Budget Office will release its budget and economic outlook at 2 p.m. … Thursday … Senate Finance holds a hearing on modernizing trade laws at 10:30 a.m. … Friday … CBO Director Phillip Swagel speaks at the Bipartisan Policy Center’s event on the fiscal health of the U.S. at 10 a.m. …
SEC plans stablecoin case — The SEC has told crypto firm Paxos that it plans to sue the company for violations related to the Binance USD stablecoin that it issues and lists, according to WSJ. Such a case would mark another escalation in the agency's digital asset crackdown, and it comes as lawmakers have already started drafting legislation to regulate stablecoins. Paxos said it will stop issuing the BUSD stablecoin in response to an order from its regulator, the New York Department of Financial Services. Binance CEO Changpeng Zhao said if BUSD were deemed a security it would have “profound impacts on how the crypto industry will develop (or not develop) in the jurisdictions where it is ruled as such.” The latest on GOP oversight plans — We’ve got a flurry of news nuggets on House Financial Services Republicans ramping up their oversight and investigations agenda, including developments on crypto.
- Financial Services Chair Patrick McHenry and his oversight subcommittee chief, Rep. Bill Huizenga, want SEC Chair Gary Gensler to explain why former FTX CEO Sam Bankman-Fried was arrested the night before he was set to appear at a committee hearing in December. Rep. Maxine Waters responded by urging McHenry to have Bankman-Fried follow through on his plans to testify.
- On the aforementioned bank capital front, Rep. Andy Barr, chair of the financial institutions subcommittee, told MM that he also plans to closely monitor any “gold plating” of new regs and climate-risk stress testing that he said “compromise the international competitiveness of American financial institutions.”
- “We need a capital framework that not only ensures safety and soundness of the financial system, but also protects access to capital for all sectors of our economy, including energy, to help engineer the great American economic comeback,” Barr said.
- MM asked Barr Thursday whether he was concerned about recent public moves by bank regulators to try to wall off crypto risks from the traditional financial system.
- Barr said it’s something that he’ll talk about with Digital Assets Subcommittee Chair French Hill, and that he expected it to come up at a yet-to-be-scheduled bank regulator hearing.
- But Barr indicated he sees some merit in crypto caution. “Not everything the regulators do is wrong,” he said. “In light of FTX, circumspection is warranted. We’ll be looking into it.” (More on this below.)
- Today, Rep. Frank Lucas, a senior committee Republican, plans to reintroduce a bill that would restrict the SEC’s ability to implement corporate climate disclosures tied to agricultural products.
| | | Why Powell and Biden are at odds — Our Victoria Guida has news you can use today if you’re trying to understand why Fed Chair Jerome Powell and President Joe Biden are sending different messages on the U.S. economy. The short answer: Inflation is complicated. The Consumer Price Index for January, which will be released Tuesday, will probably show inflation fell for the seventh consecutive month, but Powell isn’t declaring victory like Biden. Victoria’s money quote: “I believe both [Biden] and Powell would order the same items off the menu,” said Jason Furman, who served as chief economist to former President Barack Obama. “But they think the menu is very different, with POTUS seeing the soft landing as an item that is on it while Powell is much less certain that it is.” First look: Progressives launch economic messaging campaign — Victoria also reports that Groundwork Collaborative, a progressive think tank, is stepping up its efforts to shape the narrative around the economy with a new initiative called the Economic Speakers Bureau. They’ll foster a network of people — think everyone from recently departed Biden administration officials to labor organizers to nonprofits — and do media training and provide talking points. Their pitch: Everyday people aren’t central enough in the conversations about economic policy. For now, it’s directed at shaping who gets quoted in the news — broadcast, digital, print, podcasts — but “we are already brimming with ideas for Hill engagement as well,” said Groundwork Executive Director Lindsay Owens. “We’ve centered industry and business as experts on the economy for decades. We’ve let CEOs weigh in on tax policy, but tax policy affects me and you, too.” Eric Harris, most recently an aide to the House Select Committee on Economic Disparity, has been tapped to run the project. He recently made headlines for his work on the panel that highlighted inequality through a documentary-style film. He said the speakers bureau would aim to “meet people where they’re at,” reaching them through the media they consume. Lawmakers will be eager to find ways to communicate the benefits of legislation they helped pass, like the Inflation Reduction Act, said Owens, a former staffer to Sen. Elizabeth Warren (D-Mass.). “For people like Groundwork who believe these were the right policies, now when these policies hit, we have to prove we were right.”
| | | UK gets a pass from CFIUS — The U.S. will allow the UK to keep an exemption from foreign investment screenings, including real estate deals. The FT reports that the decision by the Treasury-led Committee on Foreign Investment in the U.S. is a vote of confidence in Britain’s new foreign investment law, which has blocked several Chinese transactions.
| | | Video: A primer on crypto regulation in 2023
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| MM’s Sam Sutton and Politico Video’s Krystal Campos have a video rundown of key policymakers in the crypto regulatory debate. Click above to give it a watch. Bank regulator crackdown isn’t exactly the new ‘Choke Point’ — Digital asset advocates are starting to compare recent crypto policy moves by bank regulators to the Obama-era “Operation Choke Point,” a behind-the-scenes, DOJ-led effort that critics said discouraged banks from serving businesses like gun sellers and payday lenders. But it’s not really an apples-to-apples comparison, according to a research note from BTIG’s Isaac Boltansky and Isabel Bandoroff.
- “‘Operation Chokepoint’ was effectively covert as the pressure was applied at the bank supervisor level.” … Since the second half of last year, “every single bank regulator has expressed its concern with digital assets and issued policies that raise the bar for compliance.”
- “Bank regulatory actions over the last 6 months have made accessing the financial system more difficult for crypto firms, but it is important to underscore that this has been done in the light of day and does not carry either the political or procedural baggage of ‘Operation Chokepoint.’”
- Federal Reserve Governor Chris Waller put it this way Friday: “If people want to hold such an asset, then go for it. I wouldn’t do it, but I don’t collect baseball cards, either. However, if you buy crypto assets and the price goes to zero at some point, please don’t be surprised and don’t expect taxpayers to socialize your losses.”
- In response to the U.S. moves, some industry advocates are beginning to pitch Europe as a crypto safe haven.
| | | Trump, Kushner get boost from Saudi funds — WaPo: “The day after leaving the White House, [Jared] Kushner created a company that he transformed months later into a private equity firm with $2 billion from a sovereign wealth fund chaired by Saudi Crown Prince Mohammed bin Salman. Kushner’s firm structured those funds in such a way that it did not have to disclose the source, according to previously unreported details of Securities and Exchange Commission forms.” Blackstone burned after courting small investors — WSJ: “[Blackstone’s real-estate fund] Breit has a backlog of billions of dollars worth of redemption requests to work through, and reassuring investors remains paramount. The debacle has raised doubts about the durability of a retail-investor focused strategy and left Breit facing ongoing questions about its property valuations.” Risks lurk in ESG funds — Bloomberg: “[P]ortfolios intended to uphold environmental, social or good governance principles may end up being exposed to human-rights abuses and environmental damage via supply chains.”
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