The Board of Governors of the Federal Reserve System proposed a sweeping new rule to severely limit the physical commodity activities of financial holding companies. Principally, the FRB proposed new requirements that would materially increase FHC’s risk-based capital requirements applicable to physical commodities; impose a consolidated organization-wide 5 percent cap on the total value of commodities an FHC may hold compared to its Tier 1 capital; eliminate copper as an approved precious metal that bank holding companies are permitted to own and store; and cancel the authority of five FHCs to engage in energy management and energy tolling activities. The FRB also proposed to require FHCs to report more detailed information regarding their physical commodity activities. The FRB claimed the new rule is necessary because of the “potential environmental catastrophe and other risks associated with physical commodity activities of FHCs.” The FRB will accept comments on its proposal through December 22. Recently, the FRB recommended severely limiting the non-core bank activities that FHCs may engage in, by proposing that Congress repeal the authority of FHCs to invest in non-financial companies as part of a bona fide merchant or investment banking activity (including the authority to make investments in portfolio companies engaged in physical commodity activities) and the grandfathered authority of two FHCs to engage in physical commodity activities directly. (Click here for details in the article, “Federal Reserve Recommends Repeal of Financial Holding Company’s Authority to Invest in Commodity Firms” in the September 11, 2016 edition of Bridging the Week.)
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Federal Reserve Proposes Rule to Severely Restrict Banking Organizations From Commodities Activities
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