Much ado about systemic risk

From: POLITICO's Morning Money - Friday Sep 29,2023 12:01 pm
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POLITICO Morning Money

By Sam Sutton

Presented by Consumer Credit Card Protection Coalition

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.

QUICK FIX

NEW YORK — Federal banking regulators are moving ahead with plans to overhaul capital requirements over the objections of Wall Street’s largest banks. Now, a $20 trillion-plus universe of asset managers, mutual funds, private credit specialists and hedge funds is wondering when it will be their turn to get called to the carpet.

FDIC Chair Martin Gruenberg’s speech last week about systemic risks posed by nonbanks set off alarm bells across Manhattan and Washington over when Biden administration regulators might start singling out individual firms as “systemically important financial institutions,” multiple industry sources have told your host.

The Financial Stability Oversight Council, which includes Gruenberg and other top markets and banking regulators, has been weighing a plan to do just that since April. That could reignite a battle with industry groups that secured a major coup when former Treasury Secretary Steven Mnuchin defanged the dreaded “SIFI” designation process during the Trump administration.

The difference now is that nonbanks are bigger and much more powerful than they were before the financial crisis.

Take private credit. The asset management shops behind private debt funds — which offer loans through funds backed by institutional investors, rather than deposits — were growing quickly even before the collapse of Silicon Valley Bank prompted a slowdown in bank lending.

But the chilly credit conditions projected by bank lenders has created an opening for those funds “to step up and help finance the real economy,” Katie Koch, the CEO of the asset management firm TCW, said at CNBC’s Delivering Alpha conference on Thursday. Indeed, firms like Blackstone Group have already started to pursue partnerships with regional banks to backstop lending activity.

The exodus of lending activity and leverage to the world of private credit and so-called shadow banks is now a major talking point in the banking lobby’s bid to beat back Basel III reforms championed by Fed Vice Chair for Supervision Michael Barr. (JPMorgan CEO Jamie Dimon famously claimed that hedge funds, private equity and private credit firms were “dancing in the street” once Barr unveiled the proposed capital constraints.)

Gruenberg’s speech was a direct acknowledgment that regulators share some of the banking lobby’s concerns and that they need to do more to uncover any systemic dangers nonbanks could pose to both banks and markets. If you ask regulators, those risks aren’t fully visible or understood.

And if you ask asset managers — or insurance companies, or hedge funds, or private equity firms — any assertions of systemic risk are either overblown or missing the point.

“Interest in non-bank [activity] clearly picked up after the Silicon Valley Bank failure,” Managed Funds Association President and CEO Bryan Corbett, who represents the private credit and hedge fund industry around Washington, told your host Thursday. The recent chatter from bankers and regulators about nonbank risks is “somewhat to deflect from the concerns around existing bank regulation,” he added.

Gruenberg has argued that both need to be examined. And while his remarks were prescriptive in his vision for how FSOC should tailor regulations to the specific risks posed by certain nonbanks — he also spotlighted risks that aren’t easily addressed by targeting individual firms.

“There's an assumption that; because designation is the clearest statutory authority that FSOC has, they’re trying to use designation to solve every problem,” said Jonah Crane, a former Deputy Assistant Treasury secretary who led FSOC’s examination of the risks posed by hedge funds. “It's just not the right answer for a lot of the problems that FSOC identifies.”

“That’s not always the answer. In fact, it’s only the answer in a small subset of cases,” he added. “Usually the answer is: ‘Hey, there's a regulator in charge somewhere here. That regulator needs to pay attention to these risks and do something about it.’”

Which raises the question: Will they?

IT’S FRIDAY — Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com

 

A message from Consumer Credit Card Protection Coalition:

With a government shutdown on the line, why are some politicians more focused on defunding your data security than protecting hard working Americans? If Congress passes the Durbin-Marshall Credit Card bill, it would defund data security for credit card transactions, leaving millions of Americans exposed to more fraud and hacking just to fund big retailer bailouts. Learn more and tell Congress to stop the Durbin-Marshall credit card bill.

 
Driving the Day

The CFTC has a closed meeting at 9 a.m. … Treasury Secretary Janet Yellen will deliver remarks on the infrastructure law’s role in boosting the economy at 11:50 a.m. … Treasury officials will speak at an Urban Institute event on climate change and household finances at 1 p.m.

PCE on deck — With Wall Street and Main Street now anticipating interest rates to stay higher for longer, the Commerce Department at 8:30 a.m. will provide an update on how inflation fared in August. The headline numbers will likely be higher than what we’d seen over the summer – largely due to a spike in energy and gas costs — but the core personal consumption expenditure is expected to climb by monthly rate of about 0.2 percent, which would be a sign that price growth is slowing in key sectors of the economy.

— And despite some worrisome headlines, including from your Morning Money hosts, the White House got a solid second quarter gross domestic product revision on Thursday showing the economy grew at a healthy 2.1 percent clip, Reuters reported.

 

A NEW POLITICO PODCAST: POLITICO Tech is an authoritative insider briefing on the politics and policy of technology. From crypto and the metaverse to cybersecurity and AI, we explore the who, what and how of policy shaping future industries. We’re kicking off with a series exploring darknet marketplaces, the virtual platforms that enable actors from all corners of the online world to traffic illicit goods. As malware and cybercrime attacks become increasingly frequent, regulators and law enforcement agencies work different angles to shut these platforms down, but new, often more unassailable marketplaces pop up. SUBSCRIBE AND START LISTENING TODAY.

 
 

Bidenomics Shaky ground Our Adam Cancryn: “President Joe Biden placed a big bet that he could sell an improving economy under the banner of “Bidenomics.” Three months later, some allied Democrats fear he’s made a serious misstep. Several top Biden allies have privately raised concerns about the phrase to the White House, according to two people familiar with the backchanneling. And Rep. Steven Horsford, who chairs the Congressional Black Caucus, said in an interview this week that he’s warned the White House that the Bidenomics brand is built on shaky ground.”

— A hot inflation read would reinforce the “higher for longer” narrative that Federal Reserve Chair Jerome Powell hammered home after the central bank’s most recent meeting. As Victoria Guida, Katy O’Donnell and your host report, “the economy has been strong enough to handle higher rates, but it’s not designed for them to stay that way for long after a decade and a half of ultra-low borrowing costs.”


Shutdown watch — The Senate passed its stopgap measure even as it weighed changes to placate House Republicans, our Caitlin Emma reports. Were they placated? No.

— “The House Freedom Caucus are demanding Speaker Kevin McCarthy answer questions about the path forward on government funding while also publicly denouncing a bipartisan Senate stopgap proposal,” writes Anthony Adragna.

— Meanwhile, we’re getting more of a sense from the agencies about their shutdown plans. Will this put off the resumption of student loan payments? No. Those are still due, our Michael Stratford reports. But if you’re waiting for the IRS to process your taxes — or send you a refund — that could be delayed, writes Brian Faler.

 

A message from Consumer Credit Card Protection Coalition:

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On the Hill

SAFER Banking — Our Natalie Fertig has the latest on the cannabis banking bill: “A markup fight set up the next round of negotiations in the Senate over when to add criminal justice reform provisions and how far to push Republicans on the issue before they abandon ship.”

That’s Sen. Rand Paul’s music — Jasper Goodman reports that the Kentucky Republican blocked Sen. John Kennedy’s (R-La.) request for unanimous consent to pass a bill to reauthorize the current flood program through the end of the year – imperiling the program as Congress hurtles to a shutdown.

First in MM: Senators want China crackdown to stop textile ‘disaster’ — Zach reports: A bipartisan group of senators is calling on President Joe Biden to curb Chinese trade practices that they say imperil textile production in the U.S. and around the region.

The eight lawmakers — led by Sens. Thom Tillis (R-N.C.) and Sherrod Brown (D-Ohio) — want Biden to convene an interagency meeting including leadership from USTR, Commerce, Homeland Security, Treasury and the National Security Council.

“This is largely a result of China’s aggressive and illegal practices of transshipment, undervaluation of cheap products, forced labor, skirting tariffs and penalties, and countless other tactics that are undermining U.S. supply chains,” they said.

Meanwhile — The WSJ: “Beijing and Washington are paving the way for Chinese leader Xi Jinping to visit the U.S., moving ahead with high-level official exchanges and taking other steps to improve the tone of their turbulent relations.”

 

Enter the “room where it happens”, where global power players shape policy and politics, with Power Play. POLITICO’s brand-new podcast will host conversations with the leaders and power players shaping the biggest ideas and driving the global conversations, moderated by award-winning journalist Anne McElvoy. Sign up today to be notified of the first episodes in September – click here.

 
 
Regulatory Corner

More is needed — From Victoria: “The Federal Reserve’s inspector-general on Thursday urged the central bank to improve its supervision of regional lenders in the wake of Silicon Valley Bank’s collapse.”

Another Trump case — Our Erica Orden: “A New York appeals court on Thursday denied Donald Trump’s last-ditch effort to delay a civil trial in which he is accused of massive business fraud, allowing the trial to begin Monday as scheduled.”

Jersey Pie or Deep Dish — Our Declan Harty: “One of the country’s largest electric utilities will pay $46 million to settle SEC charges tied to a yearslong political corruption scheme centered on former Illinois House Speaker Michael Madigan.”

 

A message from Consumer Credit Card Protection Coalition:

It’s never the right time to defund data security, but that’s exactly what the Durbin-Marshall Credit Card bill would do to millions of credit card transactions if it became law. With fraud and cyber crime at all time highs and the threat of a government shutdown, now is not the time for Congress to defund data security. Instead, Washington should prioritize protecting our private financial information, not make it easier for cyber criminals to hack into your wallet.

Learn more and tell Congress to say no to defunding data security by rejecting the Durbin-Marshall credit card bill.

 
 

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