• Elizabeth Warren urged regulators to revoke Morgan Stanley’s Section 23A exemption
• Warren said the move lets the bank fund overseas investment banking activity with insured deposits
• The senator argued regulators failed to prove the exemption serves the public interest
• Warren linked the decision to past crises including Citi’s subprime losses and JPMorgan’s London Whale scandal
• She challenged statements by Fed Vice Chair Michelle Bowman regarding overseas banking losses
• Warren warned the restructuring could expose the U.S. banking system to European market risks 

Sen. Elizabeth Warren has intensified scrutiny of U.S. banking regulators after demanding they reverse a controversial exemption granted to Morgan Stanley that permits the firm to fold its German investment banking operations into its holding company structure.

In a sharply worded letter sent Wednesday to the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, Warren argued the agencies failed to provide sufficient justification for approving the Section 23A exemption.

The Massachusetts Democrat said the regulators “provided no analysis or evidence” showing the waiver was either in the public interest or aligned with the intent of federal banking law.

Warren pointed to the origins of Section 23A, which Congress strengthened in 1933 following the Great Depression to stop banks from using federally backed deposits to support risky activities conducted by affiliated nonbank entities.

According to Warren, Morgan Stanley’s German unit conducts extensive investment banking and trading activity involving fixed income and equity products, capital markets services and research operations.

She argued the restructuring is designed primarily to secure cheaper funding through federally insured deposits.

“Morgan Stanley has not been shy about the intent of the transaction,” Warren wrote. “It is engaging in this restructuring to fund the affiliate’s existing business with cheaper federally insured deposits, thereby cost saving and improving profitability.”

The senator rejected profitability and efficiency as legitimate reasons for granting such relief under federal law.

She also dismissed arguments that the restructuring would improve services for European customers, saying those benefits do not satisfy statutory requirements for an exemption.

Warren further warned that the arrangement could shift deposits away from lending activity within the United States while exposing the American banking system to instability tied to European financial markets.

She has asked regulators to explain by June 3 why they believe the exemption serves the public interest and whether U.S. customers will see any meaningful improvements in banking services as a result of the move.

Calling the waiver request “unprecedented outside of a financial crisis,” Warren compared the Morgan Stanley restructuring to previous episodes that contributed to significant banking losses.

She cited Citigroup receiving a Section 23A waiver in 2006 that allowed subprime mortgage assets to be transferred into its insured banking entity ahead of the 2007 – 08 financial crisis.

Warren said regulators later acknowledged that restructuring increased losses during the meltdown.

She also referenced the 2012 “London Whale” trading scandal at JPMorgan Chase, in which the bank lost more than $6 billion through credit derivatives trades tied to a London subsidiary.

The episode ultimately resulted in more than $1 billion in regulatory fines.

Warren criticized regulators for failing to address either case when evaluating Morgan Stanley’s application.

She also challenged comments made by Michelle Bowman, who argued in a voting statement that U.S. banks had not suffered material losses from overseas activities.

Warren said that claim was “directly and obviously contradicted by recent history,” pointing specifically to the London Whale losses and the role foreign activities played during the global financial crisis.

The senator argued the Morgan Stanley exemption fundamentally conflicts with the purpose of Section 23A because it expands the federal safety net to support a nonbank affiliate.

“The banking agencies have previously defined the public interest as assuring the safety and soundness of the banks, protecting the deposit insurance fund, and limiting the extension of the federal safety net,” Warren wrote.

She additionally requested copies of any Section 23A waiver applications submitted since the beginning of President Donald Trump’s second administration, along with internal analyses related to risks posed to the federal deposit insurance fund.

Warren warned that if regulators refuse to reverse the exemption, future administrations may ultimately be forced to unwind the restructuring and require divestiture of transferred assets and liabilities.