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Presented by MFA: Delivered daily by 8 a.m., Morning Money examines the latest news in finance politics and policy. | | | | |  | | By Victoria Guida | | | 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.
| | The beginning of 2024 is filled with optimism about the path of the economy, with the U.S. managing to escape recession this far into the interest-rate hike cycle. And that resilience looks durable, given the strength of the labor market and consumer spending. There are always risks that financial firms have to keep an eye out for, however. Rates are likely to stay elevated well into the year, putting pressure on more fragile debtors like commercial real estate borrowers. But often the most dangerous problems are the ones you aren’t paying attention to. As the World Economic Forum kicks off in Davos, Switzerland, your MM host asked some influential people what some of the most underrated risks are for the year ahead. Bank of New York Mellon CEO Robin Vince: “While inflation has slowed and we’ve seen markets respond enthusiastically to the news of likely rate cuts on the horizon, geopolitical turmoil in Europe and the Middle East reminds us that there is contagion risk across markets. The risk of a disruption outside of the banking system continues to grow. Lastly, the rising prevalence of technologies such as AI present opportunities for further innovation in a smart, secure way, ever vigilant of the risks and with the ever-present shadow of cybersecurity hovering around the corner.”
| | | | JOIN 1/31 FOR A TALK ON THE RACE TO SOLVE ALZHEIMER’S: Breakthrough drugs and treatments are giving new hope for slowing neurodegenerative diseases like Alzheimer’s disease and ALS. But if that progress slows, the societal and economic cost to the U.S. could be high. Join POLITICO, alongside lawmakers, official and experts, on Jan. 31 to discuss a path forward for better collaboration among health systems, industry and government. REGISTER HERE. | | | | | Treasury Undersecretary Nellie Liang: “Technology and innovation are key strengths of the U.S. financial system, but they also have the potential to fundamentally transform financial services and create unexpected risks. Financial innovation allows existing firms and new entrants to offer new products and services that can be faster and cheaper, but also more operationally complex and reliant on emerging untested technologies. Financial firms and regulators alike need to assess how technological advances affect consumer and investor protection, safety and soundness, operational resilience, and financial stability risks, and to adjust regulatory boundaries as the system evolves.” Acting Comptroller of the Currency Michael Hsu: “I believe the most underrated risk of 2024 is operational resilience, i.e., the ability to maintain services despite disruptions. It’s technical and messy and can take a lot of time, effort, and money to address properly. It is inversely correlated with technology debt and prone to deferred maintenance, band aids, and muddling through. Responsibility for it is increasingly diffused across multiple parties, which creates accountability issues. It is critical that it not remain in the middle of everyone’s ‘to-do’ list nor be over-shadowed constantly by higher profile risks.” Sarah Bloom Raskin, former deputy Treasury secretary and onetime Fed governor: “From a macro perspective, we could see signs in 2024 of the effects of a gulf between current climate policies and the ongoing energy transition. For example, the US policy stance currently is to trust that a subsidy-based proliferation of private sector clean energy projects will be sufficient to address emerging macro challenges inherent in the market's energy transition. But challenges like energy shortages, critical mineral shortfalls, price volatility and distributional inequities could get starker. If the private-sector driven energy transition gets messy like this, we could see more demands for back-door and taxpayer funded bailouts, as well as recourse to other ways in which high carbon assets are de-risked.” IT’S TUESDAY — Victoria is back from some restful time off and will be guest hosting the newsletter this week while Zach Wambrodt is in Davos. Send us tips at vguida@politico.com and zwarmbrodt@politico.com.
| | | | A message from MFA: Managed Funds Association — now MFA — unveiled the next evolution of its brand, which recognizes its global leadership role in the alternative asset management industry. MFA’s mission remains unchanged — advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries, including pensions, foundations, and endowments. MFA helps its members get connected, stay informed, and shape the future of alternative asset management. Learn more at MFAalts.org. | | | | | Tuesday … The Atlantic Council holds an event on reimagining global economic governance at 9:30 a.m. … Fed Governor Christopher Waller speaks at the Brookings Institution at 11 a.m. … Wednesday … Fed Vice Chair for Supervision Michael Barr speaks on cyber risk at 9 a.m. … U.S. Chamber of Commerce holds a conference starting at 8 a.m. featuring Fed Governor Michelle Bowman and Reps. Andy Barr (R-Ky.) and Bill Foster (D-Ill.) … Public Citizen hosts an event starting at 1 p.m. featuring SEC Chair Gary Gensler and Rep. Maxine Waters (D-Calif.) … the Joint Economic Committee holds a hearing on affordable housing supply at 2:30 p.m. … Thursday … The American Bar Association’s Banking Law Committee holds its annual meeting through the end of the week … OCC’s Hsu speaks on bank liquidity and mergers at Columbia Law School at 9:30 a.m. … FHFA Director Sandra Thompson speaks at National Fair Housing Alliance event on artificial intelligence at 9:10 a.m. … the House Financial Services Oversight and Investigations Subcommittee holds a hearing on the SEC’s climate disclosure rule at 10 a.m. … the Senate Banking Committee holds a hearing on technology and China at 10 a.m. … The House Small Business Committee holds a hearing on capital access at 10 a.m. … Friday … Fed’s Barr and FDIC Chair Martin Gruenberg speak on bank regulation at National Fair Housing Alliance event at 1 p.m. … Wall Street to bank regulators: Try again — Some of Washington’s top business groups are pressing bank regulators to take another stab at implementing the latest standards from the Basel Committee on Banking Supervision, our Declan Harty reports. In a letter, the Bank Policy Institute, the Financial Services Forum, SIFMA and the Chamber of Commerce on Friday blasted the capital rule as drafted and warned that any final rule derived from it would violate procedural law. The letter marks the latest shot from Wall Street to knock down — or at the very least slow down — the planned rule. But Todd Phillips, a long-time investor advocate, argues that the warning is a “gift” to regulators, outlining clear areas where they could improve it. “And importantly,” Phillips added, “courts review the final rule for compliance with administrative procedure, not the proposal." Basel comment palooza — Public input is due today to U.S. bank regulators on the capital proposal, known to friends and enemies as Basel III Endgame, and comment letters are already starting to flood in. (MM cites a few below, but there are many more.)
- The Institute of International Bankers says the draft rule would create an uneven playing field between foreign and domestic banks, raising so-called capital requirements on so-called Category III and IV firms (think large regional banks, though you can find a more specific handy visual here) by 14 percent if they are foreign, but only 6 percent if they are domestic.
- The National Association of Manufacturers cites a number of worries about the proposal, including that it will make hedging more expensive, reduce their options for managing their cash flow and increase the cost of working capital lines of credit.
- The Coalition for Derivatives End Users warns that the availability and cost of derivatives for all manner of corporations would increase if the Basel rules are implemented as proposed.
- Better Markets, a nonprofit pro-regulation advocacy group, strongly supports the approach taken by the agencies, highlighting the benefits of higher capital, though it notes that the proposal wouldn’t make capital rules any less complex.
Fed balance sheet in focus — Fed officials are starting to consider slowing the pace at which they are shrinking their bond holdings, a development that would have important implications for financial markets, WSJ’s Nick Timiraos reports.
| | | | A message from MFA:   | | | | | EXCLUSIVE: BofA in Ukraine, meeting with Zelenskyy in Davos — Bank of America is in the midst of a flurry of activity to help boost Ukraine’s financial recovery. Bank of America CEO Brian Moynihan told Zach on the sidelines of the World Economic Forum that BofA president of international Bernie Mensah was in Ukraine on Friday as part of a small delegation with Penny Pritzker, the Biden administration point person for Ukraine’s economic recovery. Per a BofA spokesperson, Mensah will join Moynihan, Pritzker and others in follow-on meetings in Davos with President Volodymyr Zelenskyy and other Ukraine officials. Moynihan said in the interview that BofA is providing advice to Ukraine related to capital markets. The bank is a market maker in bonds. “We didn’t have a lot of operations in the country but you’re trying to give them the benefit of your advice about how to think about it,” he said. “It’s a pretty good-sized economy. You’ve gotta get it going again.”
| | | | YOUR GUIDE TO EMPIRE STATE POLITICS: From the newsroom that doesn’t sleep, POLITICO's New York Playbook is the ultimate guide for power players navigating the intricate landscape of Empire State politics. Stay ahead of the curve with the latest and most important stories from Albany, New York City and around the state, with in-depth, original reporting to stay ahead of policy trends and political developments. Subscribe now to keep up with the daily hustle and bustle of NY politics. | | | | | Q&A: Ajay Banga — Zach also caught up with the World Bank president ahead of Davos, where they discussed climate and ESG, interest rates and Donald Trump. Pros can read it here. World leaders have Trump on the brain — Attendees at Davos are nervous that Donald Trump will be even more anti-global if he returns as United States president, and they have good reason to be wary, our Suzanne Lynch and Zach report. The global elite “should be afraid of [Trump],” Sen. J.D. Vance (R-Ohio) said in an interview with POLITICO. “If Trump stands for anything, I think it's the rejection of their ideology, of the material benefits that come from it.” Just in: Dirty money flows topped $3T in 2023 — According to a new report from Nasdaq, $3.1 trillion in illicit funds traveled through the global financial system, including $782.9 billion in drug trafficking activity and $346.7 billion in human trafficking, as well as $11.5 billion in terrorist financing. Meanwhile, bank fraud and scams led to $485.6 billion in losses worldwide. IMF report: 40 percent of jobs exposed to AI — Forty percent of workers globally have jobs that will be affected by artificial intelligence, warns a study by the International Monetary Fund. Mature economies — such as the European Union, the United Kingdom and the United States — have even higher exposure, with more jobs requiring cognitive tasks, our Pieter Haeck reports. Sanctions recommendations — The European Union needs to raise its game on enforcing Western sanctions against Russia, or run the risk that financial institutions headquartered in the bloc that fail to comply end up being punished by the United States, warns the sanctions team at U.K.-based think tank RUSI, our European colleague Doug Busvine reports. Washington raised its sanctions game just before Christmas when President Joe Biden signed an executive order empowering its Office of Foreign Assets Control (OFAC) to target foreign financial institutions for violating U.S. sanctions. That exposes financial institutions in the EU, which has no central authority to enforce its own (very similar) sanctions and member countries apply the rules inconsistently.
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