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In This List

Washington Wrap — Congress orders CECL study; Warren chides Fed over Truist deal

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Washington Wrap — Congress orders CECL study; Warren chides Fed over Truist deal

The Washington Wrap is a weekly recap of financial regulation, news and chatter from around the capital. Send tips and ideas to polo.rocha@spglobal.com, david.hood@spglobal.com and declan.harty@spglobal.com. The Washington Wrap is going on vacation for the holidays. It will next be published Jan. 10.

In Congress

Congress adjourned for 2019 with a nearly $1.4 trillion spending package that funds government agencies and includes a number of measures sought by lawmakers who oversee the financial services sector.

One provision directs the Treasury Department to study whether capital requirements mandated by the current expected credit loss accounting standard need to be changed. The standard, known as CECL, alters how companies estimate and record loan losses on their books. It requires companies to reserve the expected amount of a loan's lifetime loss on the day the loan is originated.

The Treasury study will be conducted "in consultation" with the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration. It is due 270 days after the bill is enacted.

Rep. Blaine Luetkemeyer, R-Mo., has made the federal government's CECL study a top priority. The lawmaker has requested the study from every federal financial regulator in hearings, letters and bills.

Also included in the spending package were extensions to a pair of insurance programs critical for covering flood insurance and domestic terrorism attacks.

Congress passed a seven-year extension of the Terrorism Risk Insurance Act, which provides a federal backstop to insurers offering terrorism risk insurance. It also passed an extension of the National Flood Insurance Program without reforms until Sept. 30, 2020. The program services about 5 million flood insurance policies nationwide.

Sen. Elizabeth Warren, D-Mass., continued to blast federal banking regulators for their decision to approve the Truist Financial Corp. deal. In a nine-page letter to Fed Vice Chairman for Supervision Randal Quarles, Warren and Rep. Jesús García, D-Ill., asked for the agency's detailed justifications for approving the deal.

"The approval process largely occurred behind closed doors, and only limited information as to how your agency evaluated the costs and benefits of the transactions to consumers has been made public," the lawmakers wrote. "Consumers deserve to know exactly how these decisions are made by your agency."

Warren has been critical of the merger since February, and two weeks before Warren and García sent their letter to Quarles, they introduced a bill that would require federal banking regulators to increase their scrutiny of bank deals.

At the SEC

U.S. regulators are attempting to open up the private capital markets to a wider swath of investors.

On Dec. 18, the SEC approved a proposal to expand its definition of an accredited investor. The title, historically limited to wealthy individuals and large institutions, would be broadened under the SEC proposal to additionally include investors who hold certificates that indicate a certain level of financial sophistication.

By expanding the accredited investor definition, the SEC would provide more individuals and institutions with an opportunity to invest in private companies' securities offerings, hedge funds and other riskier investment vehicles.

SEC Chairman Jay Clayton has hinted for several months that the SEC was exploring ways to open up the private markets further, in hopes of leveling the playing field for mom-and-pop investors. At the SEC's Dec. 18 open meeting, Clayton signaled that the expansion of the accredited investor definition, which still has to be finalized, will not be the only effort the SEC undertakes to further open the private markets.

"I expect more to come in this space in the coming months, including examining whether appropriately structured funds can facilitate greater Main Street investor access to private investments, particularly as a component of an investment portfolio that is analogous to the portfolio of a well-managed pension fund," Clayton said.

At the Fed

A recent survey by the Fed showed banks decided not to take advantage of increased demand for overnight lending in mid-September because of regulatory restrictions like the supplementary leverage and liquidity coverage ratios. The study also showed that banks' appetite for risk was lower, and the opportunity was laced with a high degree of uncertainty.

In September, short-term borrowing rates spiked amid a liquidity crunch, compelling the Federal Reserve Bank of New York to conduct $53.15 billion in repo purchases to help calm the market. The Fed has been actively supplying liquidity in the market ever since.

Elsewhere, Lael Brainard, a member of the Fed's Board of Governors, gave an update on digital currencies and stablecoins. Speaking at the European Central Bank colloquium in Frankfurt, Germany, Brainard cautioned that stablecoins could put consumers at risk if they do not have adequate safeguards.

The regulator, who has previously called for Facebook Inc.'s Libra project to specifically define its financial activities, said it presents additional concerns beyond other stablecoin networks.

One such concern is that the Libra payment system could be globally adopted in a short period of time and could establish itself as a new unit of account, Brainard said. "Unlike social media platforms or ridesharing applications, payment systems cannot be designed as they develop, due to the nexus with consumers' financial security," she said.

Also in her Dec. 18 speech, Brainard said the Fed will collaborate with other jurisdictions "as we continue to analyze the potential benefits and costs of central bank digital currencies." In the past, Brainard has called a Fed-issued digital currency nothing more than an "intellectual exercise."