What’s that cloud look like? To Chopra, stability risk

From: POLITICO's Morning Money - Thursday Jul 20,2023 12:01 pm

Jul 20, 2023

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The Financial Stability Oversight Council’s move to slap individual nonbanks with a “systemically important” tag has already ticked off Wall Street asset managers and mutual fund shops. Big Tech might be next.

CFPB Director Rohit Chopra has previously warned about the threat cloud-based computing systems could pose to the financial system. But as FSOC moves to strengthen its authorities, Chopra is taking an expansive view of what that could entail.

“We certainly need to do much more to make sure we are mitigating or addressing any risks posed by systemically important non-bank institutions,” he told your hosts in an interview earlier this week. Later adding: “There are also other functions where – if there's disruption — it could lead to market wide calamities, including failure of one of the major cloud providers.”

FSOC has been eying those potential calamities for years. The council, which is chaired by Treasury Secretary Janet Yellen and counts Chopra and eight other financial regulators among its voting members, spotlighted cloud computing risks in its most recent annual report — noting that nearly a quarter of North American banks had at least partially moved some of their core services to third-party service providers.

Data breaches and outages pose a risk – obviously – but so do the so-called “shared responsibility” models that make it hard to suss out who’s responsible for what when problems arise between banks and their third party service providers.

Chopra, a former antitrust regulator and Sen. Elizabeth Warren (D-Mass) ally whose influence carries across several federal agencies, has framed concerns as an extension of his problems with “Big Tech.” He’s long been wary of the growing role businesses like Apple, Facebook and Amazon play in the payment system. And if that means they might one day have to wrestle with the same dreaded “SIFI” designation that dogged several major insurance firms for years, so be it.

When it comes to determining what’s systemically important, “we're thinking about it across the board,” Chopra said. “Technology infrastructure, payments, and lending.”

IT’S THURSDAY — Zach is flying solo next week while your host heads back to the Bay to sip an Anchor Steam at Red’s Java House one last time. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving the day

The Chamber of Commerce will host SEC Commissioner Hester Peirce at an event on swing pricing rules at 9 a.m. … Senate Banking has a hearing on deposit insurance reform at 10 a.m. … Senate Homeland Security and Governmental Affairs has a hearing on supply chain security at 10 a.m. … The National Credit Union Administration has a meeting at 10 a.m. … Leading economic indicators for June will be reported at 10 a.m. … June existing home sales will be released at 10 a.m.

The Points Guy Goes to Washington — From Sam: “The Biden administration and key lawmakers are stepping up their fight against credit card fees that they say are slamming consumers and stifling competition.

But their ability to hack away at more than $130 billion in swipe fees and late penalties that banks and card companies charge each year could hinge on something Americans love — rewards programs that subsidize everything from airline travel to groceries. The issue is sparking a major lobbying battle in Washington, with Wall Street unleashing a wave of ads across television, radio and social networks to convince consumers that the push to curb fees would sharply limit funding for the rewards programs.

The goal is to convince ‘thousands of people to reach out to their elected representatives, to let them know how disappointed they are and how concerned they are,’ said American Bankers Association President Rob Nichols. ‘We'll spend whatever is needed.’”

It’s the economy, stupid — Wall Street investment banks have been sent reeling from a sharp decline in deal activity since the start of the year. Headcount has shrunk by more than 20,000 since the start of the year, Bloomberg’s Jennifer Surane reports, and they may face more headwinds now that the Assistant Attorney General Jonathan Kanter and FTC Chair Lina Khan have unveiled 13 elaborate “guidelines” they will follow when reviewing deals.

More from our Josh Sisco: “Both the DOJ and the FTC have already begun implementing the guidance issued Wednesday, according to officials who spoke on a separate briefing by the agencies. The administration’s legal philosophy is grounded in an inherent skepticism toward mergers and aims to prevent an array of potential harms beyond high prices, such as reduced innovation, anemic labor markets, and weakened supply chains.”

Wall Street sources were mixed on what the Biden administration’s merger gameplan will mean for investment banks in the near term. While administration officials have relished how challenges to high-profile acquisitions have chilled problematic mergers, executives at top banks have pinned the slowdown in deal flow to higher borrowing costs and market uncertainty — particularly amid the debt ceiling fight and regional bank turmoil.

“The unquantifiable part of the past few years for me has been how the rhetoric has impacted — not the deals that we've seen challenged — but rather the decisions in the boardroom,” Isaac Boltansky, director of policy research at BTIG, told MM. “This is going to be felt more so in the pipeline than in previously announced deals.”

Just as importantly, as the market’s outlook improves, some top bankers see a light at the end of the tunnel: “It definitely feels better. I think the inflation data has been better. The client sentiment is better. And now we'll have to watch and see that journey,” Goldman Sachs CEO David Solomon told analysts on the bank’s quarterly earnings call on Wednesday morning. “10-year lows in investment banking activity is not going to be the norm on a forward basis.”

Outbound incoming? — Our Gavin Bade: “The Senate could vote on a bill to increase government scrutiny of American investments in China as part of yearly defense policy legislation, Majority Leader Chuck Schumer said on Wednesday, after lawmakers scaled back the provision’s scope.”

Keep an eye on food prices — NYT: “Ships Bound for Ukraine Will Be Considered Hostile, Russia Says”

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In Congress

First in MM: GOP ramps up SBA inquiry — Zach reports: House Small Business Chair Roger Williams (R-Texas) is pressing the SBA to turn over the communications of a former senior official involved in crafting lending rules that a bipartisan group of lawmakers is looking to scale back.

Williams is seeking the records of former associate administrator Patrick Kelley’s work on new rules that opened the SBA’s flagship “7(a)” program to more nonbank fintech lenders and relaxed underwriting standards. Senate Small Business voted 18-1 to rein in those rules on Wednesday, Jasper Goodman reports — a reflection of mounting concerns that the SBA isn't ready to police non-bank lenders.

Williams said he wants to ensure that “nothing nefarious happened outside of the public notice and comment period to influence the outcomes of these rulemakings.” Sen.Joni Ernst of Iowa, the top Republican on Senate Small Business, has also sought details on Kelley’s work.

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Crypto

Will McHenry’s stablecoin bill move? — Also from Eleanor: “House Financial Services Democrats are pushing Republicans to revise their stablecoin bill ahead of a vote next Wednesday, lawmakers said. The changes sought by rank-and-file Democrats on the committee cover areas including the legislation's treatment of state-based crypto regulation and reserve requirements.”

— Later, McHenry told Eleanor that he's working to address Democrats' concerns on crypto market structure and stablecoin legislation "to the fullest extent I can" to build bipartisan support before the committee votes on July 26.

Dwindling allies? — Eleanor also reports that Sens. Jack Reed (D-R.I.), Mark Warner (D-Va.), Mitt Romney (R-Utah) and Mike Rounds (R-S.D.) introduced a bill requiring decentralized finance platforms to adhere to anti-money laundering rules. If the DeFi project isn’t controlled by anyone, liability would fall to venture capitalists that invested $25 million or more in the platform.

While he’s been vocal about his national security concerns, the industry viewed Rounds as a relatively crypto-friendly lawmaker (Coinbase’s public policy website deems him “supportive”). Backing a bill that would likely curtail investment in new crypto projects is likely to change that.

“He previously tweeted about being pro-innovation and wanting to keep development of this industry onshore,” DeFi Education Fund CEO Miller Whitehouse-Levine told MM. “Given the contents of the bill, I do think his position has apparently changed.”

Rounds’ office did not respond to a request for comment.

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Regulatory Corner

With friends like these — Our Dustin Racioppi reports: “The U.S. Attorney's Office in New Jersey charged Eliyahu Weinstein and four others in a plan that allegedly cost investors millions of dollars ….Weinstein had been serving a lengthy prison sentence for being convicted in two cases — a Ponzi scheme and real estate fraud — that led to more than $230 million in investor losses when Trump commuted his sentence in January 2021.

“His release was part of a wave of clemency actions by Trump … Weinstein's shortened sentence also had the support of U.S. Rep. Jeff Van Drew (R-N.J.), who did not immediately return a call seeking comment.”

Key context: SEC Enforcement Division Director Gurbir Grewal was an assistant U.S. attorney who helped prosecute Weinstein on the earlier charges. After Trump commuted his sentence, Grewal told NJ.com that he was “disgusted.”

“It’s no surprise that President Trump granted clemency to Eli Weinstein,” he said at the time. “It’s one huckster commuting the sentence of another. Both men have consumed far more of my professional life than I ever wanted, and I’m not going to spend more time thinking about them now.”

Maybe it’s not just crypto — Our Bjarke Smith-Meyer: “Fed dings Deutsche Bank for insufficient progress in fixing money laundering controls”

Reconsider — Our Brian Faler: “Treasury pleads with Canada not to impose digital services tax”

Jobs Report

Alexander Niejelow joined the New York Department of Financial Services as Deputy Superintendent for Innovation Policy. Niejelow, a former Obama staffer who also advised Biden’s transition team, was previously a senior vice president at Mastercard, where he led the company's cyber and innovation policy efforts.

Georgette Sierra has joined the Managed Funds Association as its vice president of U.S. government affairs. She was previously a director of U.S. public policy at Credit Suisse and is a former chief of staff to former Rep. Carolyn McCarthy (D-N.Y.).

JOIN 7/27 FOR A TALK ON WOMEN LEADERS IN THE NEW WORKPLACE: In the wake of the pandemic, U.S. lawmakers saw a unique opportunity to address the current childcare system, which has become increasingly unaffordable for millions of Americans, but the initial proposals went nowhere. With the launch of the Congressional Bipartisan Affordable Childcare Caucus in May, there may be a path to make childcare more affordable. Join Women Rule on July 27 to dive into this timely topic and more with featured speakers Rep. Nancy Mace (R-S.C.), Rep. Ro Khanna (D-Calif.) and Reshma Saujani, Founder & CEO of Moms First and Founder of Girls Who Code. REGISTER HERE.