Banking and Finance Law Daily Wrap Up, BANK HOLDING COMPANIES—Fed, OCC joint findings support Morgan Stanley’s section 23A exemption, (Mar 27, 2026)

By Shashi Kant, BALLB, LL.M.

The action will allow Morgan Stanley Europe SE, a foreign bank engaged in various securities and investment banking activities, to become a subsidiary of Morgan Stanley Bank, N.A.

The Federal Reserve Board announced that it has made joint findings with the Office of the Comptroller of the Currency required for the OCC to approve a request by Morgan Stanley Bank, N.A., for an exemption under section 23A of the Federal Reserve Act, in connection with a proposed internal corporate reorganization involving the firm’s European operations. Section 23A generally limits transactions between banks and their affiliates to protect insured depository institutions from excessive exposure to affiliated entities. The statute permits exemptions only if the Fed and OCC jointly determine that the exemption is in the public interest and consistent with the statute’s purposes, and if the Federal Deposit Insurance Corporation does not object on Deposit Insurance Fund risk grounds.

Proposed reorganization would exceed section 23A limits. According to the joint findings, Morgan Stanley proposed that Morgan Stanley Bank, N.A., acquire Morgan Stanley Europe SE and its subsidiary, Morgan Stanley Bank AG, as part of a one-time internal restructuring. Because the entities are affiliates under common control, the transaction would constitute a covered transaction under section 23A and Regulation W. The agencies said the proposed transfers, including acquisition of shares and assumption of certain assets and liabilities, would exceed the quantitative limits that section 23A imposes on transactions between a bank and its affiliates, necessitating an exemption.

Agencies cite commitments, capital position. In granting the required findings, the Fed and OCC cited representations that the reorganization would diversify the bank’s activities and revenue streams and strengthen its business model. The agencies also noted that Morgan Stanley Bank, N.A., is well capitalized and is expected to remain so following the transaction. The findings rely in part on commitments made by Morgan Stanley and the bank designed to protect against potential losses associated with the transferred assets. The agencies said those commitments are consistent with safeguards used in prior section 23A exemption approvals involving internal reorganizations. The approval is conditioned on compliance with those commitments, as well as receipt of all necessary regulatory approvals and adherence to any additional conditions imposed by relevant authorities. The findings also state that the bank must conduct the acquired activities in compliance with applicable Fed requirements, including Regulation K.

Fed board divided on exemption. The Fed approved the joint findings by a vote of 4-3, with Chair Powell, Vice Chair for Supervision Bowman, Governor Miran, and Governor Waller voting in favor, and Vice Chair Jefferson, Governor Barr, and Governor Cook voting against. In a statement, Vice Chair Philip N. Jefferson said he supported the policy objectives underlying section 23A but expressed concern about addressing such issues through firm-specific exemptions rather than a broader rulemaking. He said the decision could set precedent and potentially expand the federal safety net. Governor Michael S. Barr also dissented, stating that the exemption could allow riskier activities conducted abroad to be supported by insured deposits and could increase potential exposure to the Deposit Insurance Fund. Barr said the request did not meet the statutory standard for approval. Governor Lisa D. Cook likewise opposed the action, expressing concern that the exemption was inconsistent with the purposes of section 23A and could introduce risks not justified by clear public benefits.

In a separate speech delivered the same day, Lisa D. Cook discussed broader financial stability policy, emphasizing the importance of cross-sector risk analysis, scenario-based stress evaluation, and coordination across supervisory functions in identifying systemic risks. She noted that financial stability policy must account for complex linkages across institutions and markets, underscoring the challenges of assessing how firm-specific risks may transmit through the financial system.

Supporters cite consistency with existing structures. Vice Chair for Supervision Michelle W. Bowman supported the findings, stating that U.S. banking law has long permitted certain securities and international activities through subsidiaries and that similar structures already exist at other large banking organizations. She said the transaction would support business diversification and competitiveness. In separate remarks, regulators emphasized that the FDIC did not object to the exemption on the basis of risk to the Deposit Insurance Fund, satisfying a statutory condition for approval.

Warren criticizes decision. Senator Elizabeth Warren (D-Mass.) released a statement criticizing the Fed’s action, stating that it would allow Morgan Stanley to use federally insured deposits to support riskier activities and weaken longstanding safeguards intended to separate banking from higher-risk financial activities.

Next steps. The Fed’s action constitutes the required joint finding for OCC approval of the exemption request. The agencies emphasized that the determination is based on the specific facts and representations provided and could be reconsidered if those conditions change.

Companies: Morgan Stanley Bank AG; Morgan Stanley Bank, N.A.; Morgan Stanley Europe SE

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