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 [email protected] and Zach at [email protected]
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