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Washington Wrap — Fed wraps up busy week, has more on its plate

The Washington Wrap is a weekly look at regulation, news and chatter from the Capitol. Send tips and ideas to brian.cheung@spglobal.com, declan.harty@spglobal.com and polo.rocha@spglobal.com.

At the Fed

The Federal Reserve finished a new rule aimed at limiting the credit risk contagion between large banks — and is working to get a wide array of other regulatory tasks off its plate.

Key among those tasks is the Fed's work to decide whether and how it will apply extra supervision to banks between $100 billion and $250 billion in assets. Those banks could get some major regulatory relief under the Dodd-Frank revision package that President Donald Trump signed into law.

The new law has prompted the Fed to adjust how it is approaching its regulatory work. For example, the single-counterparty credit limit rule the Fed finalized June 14 is, for now, aimed at banks above the $250 billion asset threshold. Fed officials are still deciding which banks between $100 billion and $250 billion they will choose to keep additional supervision for, as well as what specific restrictions they may face.

Fed Vice Chairman for Supervision Randal Quarles said at a June 14 board meeting that Fed staff are "working on a comprehensive proposal" to determine what that new framework would look like.

They also are working to finalize a proposed net stable funding ratio rule, which would raise liquidity requirements for large banks. "It's actually a pretty full docket right now," Fed Chairman Jerome Powell told reporters June 13.

On other regulatory matters, Powell did not rule out the possibility of the Fed asking the largest U.S. banks to hold more capital under its new countercyclical capital buffer tool, or CCyB. Powell said he thinks financial risks are moderate right now, below the level needed for the Fed to activate the CCyB. But he noted that could change over the next couple of years.

Powell spoke just after the Federal Open Market Committee announced that it raised its benchmark interest rate for a second time this year, while also signaling a quicker path ahead on rate hikes.

On Capitol Hill

Comptroller of the Currency Joseph Otting faced heated questions from members of Congress on June 13 and 14 after telling the House Financial Services Committee he had "never observed" discrimination in the U.S., despite serving as a top regulator of the Community Reinvestment Act.

On June 14, he clarified his comments to the Senate Banking Committee, telling lawmakers he meant to say he had never "personally experienced" discrimination.

In his hearings, Otting provided more detail about the agency's horizontal review of sales practices at the nation's largest banks. The Office of the Comptroller of the Currency reported that of the 500 million to 600 million accounts it reviewed, it found around 20,000 accounts that were either opened without client permission or lacked documentation to prove that there was permission. The agency issued 252 matters requiring attention, 20% of which have been closed.

Otting also said an official agency stance on the special-purpose bank charter will come in July, and said he was working with the Securities and Exchange Commission to help banks interested in scrapping their holding companies.

At the SEC

A top official at Wall Street's chief regulator recently provided a hint of clarity on the regulatory confusion still swirling around cryptocurrencies.

William Hinman, director of the SEC's division of corporation finance, said June 14 that sales of the cryptocurrency ether cannot be considered securities transactions, based on the current structure of the digital currency. Ether is the second-largest digital token based on market capitalization, trailing only bitcoin, according to CoinMarketCap.com.

The comments potentially set ether up to take a path similar to bitcoin, which has been classified as a commodity by the U.S. Commodity Futures Trading Commission. Bitcoin has been adopted across Wall Street by companies like Goldman Sachs Group Inc., Intercontinental Exchange Inc. and CME Group Inc., which are exploring or introducing business lines focused around the cryptocurrency.

Market participants and financial institutions have been wary to enter business arrangements around ether, though, as the regulatory landscape has largely remained murky until now.

The SEC has also been cracking down on fraudulent digital currencies in the meantime. On numerous occasions, SEC Chairman Jay Clayton has said digital tokens sold through initial coin offerings are in fact securities and thus should be registered with the SEC.

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