Board of Governors of the Federal Reserve System

Today, the Board provides an exemption to a core protection of bank safety and soundness. The exemption permits foreign trading and other nonbank activity to be funded by FDIC-insured deposits in the United States, opening up the deposit insurance fund to greater risk. And it invites over $1.5 trillion in foreign nonbank activity to come within the federal safety net from large banks who might also take advantage of such an exemption. I dissent.

I explain in further detail my views below.

First, the exemption does not satisfy the section 23A statutory factors and is inconsistent with the purposes of the statute. Second, Morgan Stanley's proposed reorganization would expand the use of the U.S. federal safety net and potentially expose MS Bank and the deposit insurance fund to increased risk of loss. Third, granting this exemption may create a consequential precedent and may encourage other large banks to pursue similar structures, compounding risks to the federal safety net and broader financial stability. Fourth, this matter should not be considered in the context of an ad hoc exemption request by a single firm.

The proposed exemption does not meet the statutory criteria
Section 23A of the Federal Reserve Act is intended to limit risks to banks and the deposit insurance fund, and therefore, help protect the integrity of the banking system.

The Board's Regulation W implementing this section restricts how much a bank can transact with its affiliates,¹ including the assumption of an affiliate's liabilities.² These rules are designed to prevent a bank from exposing itself to excessive risk through dealings with related companies, thereby preventing the misuse of a bank's resources through non-arm's-length transactions.

Exemptions from these requirements may be granted for national banks if the Board and the Office of the Comptroller of the Currency jointly determine that the transaction is in the public interest and consistent with the purposes of section 23A, and if the Federal Deposit Insurance Corporation (FDIC) does not object on the grounds that it would pose an unacceptable risk to the deposit insurance fund. The core purposes of section 23A are to protect banks from losses tied to affiliate transactions and to prevent banks from passing along the subsidy from access to the federal safety net to their affiliates.³

The proposed exemption does not meet the statutory criteria. MSESE is a full-service European investment bank with assets exceeding $85 billion and liabilities exceeding $75 billion.⁴ As part of the proposed reorganization, MS Bank would assume a significant amount of liabilities of an affiliate through its acquisition of MSESE. Under financial stress, if the assets transferred ultimately prove insufficient to support the assumption of such liabilities, MS Bank could experience substantial losses. The proposed transaction would also allow MS Bank to extend its federal subsidy to MSESE. Following the proposed reorganization, transactions between MS Bank and MSESE would no longer be subject to section 23A, 23B, or Regulation W, as MSESE would become a subsidiary of MS Bank.⁵

Therefore, MS Bank could fund MSESE's securities and investment banking activities abroad with low-cost FDIC insured deposits without being subject to section 23 and Regulation W limitations. Additionally, transactions between MS Bank and MSESE would no longer have to be on "market terms," meaning MS Bank could enter into transactions with MSESE that are on terms less favorable to MS Bank than those prevailing at the time for comparable transactions involving nonaffiliates.⁶

The proposed reorganization would also present risks to the deposit insurance fund. The use of FDIC-insured funding to facilitate non-banking activities abroad, along with increased risks to MS Bank through the assumption of MSESE's activities and liabilities, increases the potential for losses to the deposit insurance fund.

This exemption request does not meet the "public interest" standard of section 23A. Morgan Stanley's arguments in support of the public interest, specifically that MS Bank would be better diversified and better able to provide products and services to customers, do not outweigh risks imposed to the deposit insurance fund or the extension of federal subsidies to foreign nonbank activities.

The proposed reorganization would pose risks to safety and soundness
The proposed reorganization raises safety and soundness concerns. This reorganization would be the largest 23A exemption granted outside of a financial crisis. MS Bank would assume substantial liabilities from its foreign affiliate, MSESE, exposing MS Bank to the risks of MSESE's investment banking and securities activities across several foreign jurisdictions. These higher risk, nonbank activities would be conducted in the bank-chain of ownership, inconsistent with the Board's and Congress's expressed preferences for such activities to remain outside of banks. As noted above, the proposed structure would allow MS Bank to subsidize MSESE's foreign nonbanking activities using FDIC-insured deposits, exposing such deposits to the risks associated with these activities. Moreover, the Bank's assumption of new material business lines significantly increases MS Bank's operational complexity, posing complications with respect to firm management and supervision, while also making its resolvability more difficult.

Moreover, the impact of MS Bank's acquisition of MSESE should not be considered in isolation. In late 2025, Board staff, under delegated authority not voted on by the Board, provided MS Bank with a separate Section 23A exemption to acquire the fixed income derivative business of another affiliate.⁷ As part of that exemption, MS Bank similarly assumed the liabilities of its affiliate beyond the applicable limits in Regulation W and acquired that affiliate's fixed income derivative business line. The proposed reorganization and the previously approved reorganization together would represent a covered transaction amounting to multiple times the bank's capital, further exceeding the size of previous 23A exemptions and substantially altering the risk profile and complexity of MS Bank.

The proposed reorganization would encourage other large banking organizations to move foreign non-bank subsidiaries under their banks
This exemption would be seen as precedential. Since the adoption of Regulation W, the Board has not granted a section 23A exemption to enable a firm to move an affiliated foreign investment bank under its U.S. bank. Further, the Board has never granted a section 23A exemption to enable a bank to acquire a firm as large as MSESE outside of a financial crisis. Several global systemically important banks (G-SIB) have significant foreign securities entities in their holding company chains. Granting Morgan Stanley's exemption request likely would encourage other large banking organizations to seek similar exemptions to move their large foreign non-bank affiliates underneath their U.S. bank. Such a result will compound the risks associated with granting this exemption.

While Regulation K permits U.S. bank holding companies to hold foreign banks in the holding company chain or under their U.S. banks,⁸ the Board has previously explained that in enacting the Gramm-Leach-Bliley Act of 1999 (GLB Act), Congress "demonstrated a strong preference that expanded nonbanking financial activities be conducted in a structure that does not involve the federal bank subsidy,"⁹ ensuring that such activities are "subject to the restrictions on funding by a parent bank set out in sections 23A and 23B of the Federal Reserve Act."¹⁰ In implementing changes to Regulation K following the passage of the GLB Act, the Board reiterated its preference for nonbanking activities to occur through the holding company chain, not the bank, in order to assure the safety and soundness of banks, protect the deposit insurance fund, and limit the extension of the federal safety net.¹¹

Yet the Board's action could result in over $1.5 trillion in foreign nonbank activities moving under the U.S. bank safety net.

This is not an appropriate matter for the use of exemptive authority
Given the serious consequences, the significant policy issues raised, and the lack of financial emergency, this matter should not be considered in the context of an ad hoc exemption request by a single firm.

Conclusion
Granting this exemption is inconsistent with the purposes of section 23A, subsidizes the funding of foreign nonbank activities with U.S. federally insured deposits, would put the deposit insurance fund at greater risk, and weakens financial stability. I dissent.

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1. Under Section 23A and Regulation W, the amount of "covered transactions" between a bank and a single affiliate is limited to 10 percent of the bank's capital stock and surplus, and between a bank and all of its affiliates is limited to 20 percent of the bank's capital stock and surplus. 12 U.S.C. § 371c(a)(1); 12 CFR 223.11. Return to text

2. 12 CFR 223.3(dd). Return to text

3. See 67 Fed. Reg. 76560 (Dec. 12, 2002). Return to text

4. Financial figures are as of June 30, 2025, (https://sp.morganstanley.com/download/prospectus/731cff0a-9f52-463b-9eb9-2228e1a01b11/). Return to text

5. 12 CFR 223.2(b). Return to text

6. 12 CFR 223.51. Return to text

7. See, Letter from Benjamin W. McDonough, Deputy Secretary of the Board, to Jonathan V. Gould, Comptroller of the Currency (PDF) (December 12, 2025). Return to text

8. 12 CFR 211.8(b)(1); 12 U.S.C. § 601. Return to text

9. 66 Fed. Reg. 54346, 54348–49 (Oct. 26, 2001). Return to text

10. Id. Return to text

11. 66 Fed. Reg. 54346, 54348–49 (Oct. 26, 2001) ("In exercising its statutory authority under the Edge Act, the Board has sought to balance the need for U.S. banking organizations to be competitive abroad with the public interest in assuring the safety and soundness of the banks, protecting the deposit insurance fund, and limiting the extension of the federal safety net."). Return to text