The Archive

THE INTERVIEW

What’s on the mind of America’s top state bank regulator

NEW YORK — Adrienne Harris wields more power over the U.S. banking system than perhaps any other state official. As the superintendent of the New York Department of Financial Services, her decisions ripple far beyond Wall Street.

Just last week, Harris’ office toughened up guidance for its regulated crypto firms with new risk assessment standards for consumer-facing products and more. It’s the latest way that New York’s top financial regulator is establishing itself as a global leader in crypto oversight.

Harris, who took office in 2021, has also found herself in the middle of national economic politics this year. She played a key role in the spring’s miniature banking crisis. Harris even helped House Republicans design key crypto legislation that would carve out a more prominent role for states.

That’s why we recently traveled to Harris’ perch in lower Manhattan for a wide-ranging conversation about the state of the banking sector, her leading role in crypto regulation and more.

The banking system: The sector has been on the edge for much of this year. But Harris says the banking system is “very strong and very resilient.”

The American financial sector’s rollercoaster kicked off in March, when two large regional banks — California-based Silicon Valley Bank and New York-based Signature Bank — collapsed in a matter of days. The decision to close Signature came from Harris’ NYDFS.

The rapid response from both federal and state officials has been credited with stemming what could have become a panic. “A lot of people did a lot of work earlier this year to make sure that’s the case,” Harris said. “So I feel good.”

Her diagnosis echoes what we’ve heard from federal officials like Treasury Secretary Janet Yellen and the Federal Reserve’s Michael Barr.

Capital reform: The Biden administration’s push for tougher capital standards in the wake of the banking crisis this year is arguably the industry’s top threat from Washington.

Banking sector advocates say the rules under consideration are too complicated for banks to grasp their full potential impact, which risks slowing down the economy.

So we asked Harris: Is the Biden administration on the right track, or are bank regulators overreacting?

The superintendent didn’t want to opine on that without being in the room with federal regulators. But Harris said it was crucial for regulators to take industry feedback into account.

“It’s so important that all regulators — and it’s one of the things I’ve worked very hard to put in place here — be data driven, be looking at the evidence to say, ‘What is the impact of a proposal?’” Harris said.

The phrase “data driven” touches on a core complaint we’ve heard from the banking industry in recent weeks. Trade associations representing much of the financial sector warned regulators they hadn’t shown enough economic analysis to prove that capital reform is necessary.

“Not to be a complete political science nerd, but this is why we have the APA, or the state APA in our case,” Harris said. “So that stakeholders have the opportunity to weigh in both formally and then informally through engagement with the regulator.”

Commercial real estate: One of the big headwinds for the economy for a while now is uncertainty in the commercial real estate sector, where banks hold a lot of properties. Nowhere is that truer than in New York City.

But Harris says New York’s banks and supervisors are better equipped to handle that uncertainty than outside observers might assume, thanks in part to how they’ve diversified their portfolios.

Ahead on crypto: Harris defended her support for a national framework for crypto regulation without direct Federal Reserve oversight.

As lawmakers on the House Financial Services Committee spent months trying to develop bipartisan frameworks to better regulate crypto, Harris became a “central player” in those negotiations.

If that stablecoin bill eventually becomes law, Harris will have been critical in carving out a key role for state governments in the future of digital assets.

“We want federal partners at the table,” Harris said. “But there is a real role for states to play because we are here on the ground. We’re often much nimbler and can act faster.”

The bill cleared the House Financial Services Committee in July with support from all Republicans and a just handful of Democrats. It would allow state-regulated stablecoin companies to avoid direct oversight from the Federal Reserve. The Fed is not thrilled about that.

But Harris pushed back when we asked about the risks of a “race to the bottom” in stablecoin regulation, where companies can theoretically migrate to states with the weakest regulation. She argued that the success so far of New York’s BitLicense, the state’s business license for crypto firms, is proof that tougher rules can attract business when regulators are transparent.

What to watch: Congress is going to keep thinking about the future of finance and other structural changes to the banking system for the foreseeable future. We expect state regulators like Harris to continue to play a key role in those discussions.

— Brendan Pedersen (Photo credit: Johnny Angelillo for Punchbowl News)

DEPARTMENT OF MACRO BETS

Wall Street’s fraught, lucrative world of betting on Washington

When lawmakers take a new policy position, tweet about a bill or vote “yes” or “no” on any piece of legislation, Wall Street is watching.

At The Vault, we translate Washington to the financial world. But this time, we’re flipping things around to highlight one key way that Wall Street and others in the business community have their sights on Capitol Hill.

Let’s be blunt: There are many, many millions of dollars at stake as Congress hurtles toward a government shutdown.

And the U.S. economy continues to sit in a strange spot. Years of mammoth federal spending from both the Trump and Biden administrations has dampened Capitol Hill’s appetite to dole out more dollars in 2023 and beyond. But even as the Fed has hiked rates at a historically fast pace in response to inflation, the jobs market has held strong.

So when it comes to the spending fight happening now in Congress, traders on Wall Street see a potential turning point in long-term U.S. fiscal policy. Whatever happens is sure to reverberate at home and around the world.

“To me, this is potentially a key moment,” one trader told us. “It’s less about shutdown or no shutdown — you could have the same effect on fiscal spending if Democrats agree to compromise” with House Republicans.

In the world of macro trading, keeping tabs on D.C. developments can be as central as tracking bond yields. Some firms’ investment strategies revolve around just a handful of singular events, like the Fed’s interest rate moves or whether federal antitrust regulators will crack down on mergers.

For instance, if a fund wants to bet that U.S. interest rates will keep going up, it might short sell tranches of two-year Treasuries. If another fund thinks the Inflation Reduction Act’s impact on clean energy is overhyped, it could short solar and wind energy companies.

The strategy partly revolves around relationships with a cadre of current or former Washington insiders tapped to help make crucial and timely decisions.

It’s a bold approach when it comes to Congress. There are few sure bets in the nation’s capital, where U.S. lawmakers prefer to drag out even the most critical, basic pieces of legislation to the eleventh hour.

The question for many traders with this current fight isn’t so much about whether the government shutters, even though a prolonged shutdown can shave some basis points off the country’s GDP.

The real focus will be the nature of a deal that gets struck between Democrats and Republicans, and whether that shifts the trajectory of American fiscal spending in a meaningful way.

If Democrats hold their own and Speaker Kevin McCarthy blinks, the macro environment probably won’t change too much. But should the clash result in even tighter limitations in federal spending than we saw after the summer’s debt ceiling fight, it could have an impact on everything from Treasury yields to longer-term corporate profits.

For a sector whose bottom line can make-or-break over small changes in the bond market, significant fiscal policy shifts could represent billions of dollars. Rest assured Wall Street will be holding its microscope over the dome.

— Brendan Pedersen

THE POWER MATRIX

— Brendan Pedersen

THE OUTLOOK

Gensler’s hot seat keeps on heating up

Securities and Exchange Commission Chair Gary Gensler has never been the most popular man in Washington.

But criticism from the business world, political right and even some lawmakers on the left has reached a fever pitch — all as Gensler testifies before the House Financial Services Committee today.

Republicans, particularly in the House, have all but declared war on the SEC over the past two years, and Gensler and his agency have been top oversight targets for the party.

But today’s hearing could be a new high watermark for that opposition. Lawmakers will be sure to pummel him with questions about the agency’s rulemaking blitz, a starkly unpopular custody rule, its aggressive oversight of the crypto sector and more.

House Financial Services Committee Chair Patrick McHenry (R-N.C.) chided Gensler in an interview ahead of today’s hearing.

“He’s lit so many fires. He thinks that’s to his advantage — that there’s so many rulemakings, he thinks the volume will help them get more through,” McHenry told us. “It’s deeply problematic because there are a lot of details to each one of these rulemakings that they’ve not gotten right. They’ve been sloppy.”

It’s not just Republicans: In the Senate, Democrats, including Sens. Jon Tester (Mont.) and Elizabeth Warren (Mass.) have grown frustrated with Gensler’s performance. Tester is concerned that the former MIT professor could go too far with climate risk disclosures, echoing industry concerns of paperwork overload for farmers and other small-business owners that work with public companies.

Warren, on the other hand, says Gensler hasn’t moved quickly enough to implement his progressive agenda.

“We need strong rules and we need them now,” Warren told us. “I appreciate that Chair Gensler is trying to negotiate very difficult terrain, but ultimately, he works for the American people.”

Eyes on crypto: The most consequential focus from the House Financial Services Committee over the past year has been a potential legislative reset for the crypto sector. One of those packages, via McHenry and Rep. French Hill (R-Ark.), would change the “market structure” for crypto.

The legislation could meaningfully alter the SEC’s mission with new limitations on what parts of crypto it would be authorized to regulate. Meanwhile, a much smaller federal agency — the Commodities Futures Trading Commission — would be empowered to regulate more of crypto. (The industry is thrilled.)

We still view market structure reform for crypto as a long shot. But we also don’t want to downplay the significance of the McHenry-Hill bill. It has Democratic support from McHenry’s committee. The package was also a joint effort with the House Agriculture Committee, where it received Democratic support.

“This is not just coming from Republicans,” said Rep. Zach Nunn (R-Iowa). “This is coming from both Democrats and Republicans in the House. We’re saying the overreach needs to stop.”

The clock is ticking in the meantime: Several Biden administration SEC rulemakings haven’t been finalized, including its momentous new climate risk disclosure framework.

If Gensler and other regulators can finalize their most ambitious or controversial rules early enough, they could escape the Congressional Review Act chopping block.

Should completion of these rules come down to the wire, though, lawmakers could overturn much of Gensler’s regulatory legacy — if Republicans control the federal government in 2024. No sure thing.

Both House and Senate Democrats have remained mostly — but not universally — supportive of Gensler’s SEC. The Senate Banking Committee, led by Chair Sherrod Brown (D-Ohio) has largely shrugged off serious crypto reform.

But there are some Democratic SEC detractors in the House, as evidenced by the limited-but-present bipartisan backing for McHenry’s crypto bill. Rep. Jim Himes (D-Conn.), who supports McHenry’s market structure bill, said it was a step toward order for a sector defined by chaos.

“Look, I’m a crypto skeptic,” Himes told us. “But chaos is not a good thing, and we’re seeing immense amounts of chaos in the crypto asset market. So I think the incremental approach of trying to bring some clarity is better than staying in the world of chaos. Right?”

— Brendan Pedersen