Analysis

Federal Reserve energy transaction requirement

The proposed rule

The Federal Reserve recently issued a proposed rule that would require financial holding companies (FHCs) to hold more capital in reserve against energy investments.

Limiting the flexibility of certain institutions to finance energy-related transactions

In the years following the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, BP has paid out more than $60 billion. If paid out all at once, the large sum could have shocked any bank's financial position and triggered a cascade of effects throughout the financial system. While the Fed’s stated intent is to safeguard the financial system and individual institutions from the effect of such a costly environmental disaster, the proposed rule may have unintended effects on the flow of capital within the energy sector.

This new report outlines the key challenges for FHCs and bank holding companies, long-term industry effects, and next steps for energy companies.

Driving down risk while driving out risk-takers

The proposed rule would apply to equity investments in infrastructure, such as power generating plants or distribution systems, and would impose limits on the size of an FHC’s holdings of energy-related commodities.

Some of the key changes in the proposed rule include:
  • Changes in Section 4(k) authority
  • A super capital charge for Section 4(o) and merchant banking activities
  • Reclassification of the ownership and storage of copper
  • New public reporting requirements

While it appears the proposed rule is meant to apply to a small number of large banks, it may create a proportionately larger burden for smaller ones for whom the required carrying charges represent a greater commitment.

Download the report to learn more about these key changes.

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