Casten Leads Letter to Mitigate Risk To Financial System and Consumers As Oil and Gas Markets Face Turmoil

Statement

Today, U.S. Representative Sean Casten (IL-06) led a letter with Congresswoman Cindy Axne (IA-03) to Federal Reserve Chair Powell and Commodities and Futures Trading Commission Chair Heath Tarbet urging them to mitigate the risks to the financial system and consumers as oil and gas companies face financial challenges.

As a result of the novel coronavirus (COVID), demand for oil and gas has plummeted and major oil futures markets have already posted negative prices and there is significant risk they could fall further. Reduced asset value from falling prices coupled with lack of cash flow has already driven some of the most highly debited firms into Chapter 11 bankruptcy, and more will surely follow. The significant decline in prices of virtually all commodities, including agricultural crops and industrial metals, creates similar risks in other sectors. All of these conditions have seemingly necessitated a transfer of ownership to existing creditors, at a rate and scale that could prove to be disruptive to credit and commodity markets.

The letter asks that as the Federal Reserve reviews the approval the physical commodity activities by financial holding companies (FHCs), any approval be conditioned on meeting certain requirements to mitigate the risk to financial stability and consumers. The conditions are that:

All physical commodities activities and investment of FHCs must, at least, comply with the 2016 "Proposed Rule Implementing Strengthened Prudential Requirements, including Risk-based Capital Requirements, for Physical Commodity Activities and Investments of Financial Holding Companies";
FHCs have proper firewalls and supervision to shield information transfer, both within the holding company and from the holding company to the larger bank and that those firewalls must be accompanied by strict, well-enforced penalties (150% of the financial gain) to ensure that the costs of non-compliance exceed the financial gains;
FHCs debt to equity ratio does not increase beyond that of the held assets' previous two year debt to equity ratio average from the time since taking possession of these assets;
FHCs must: (a) maintain such reserves as were held prior to acquisition by the holding company; (b) increase those reserves to the extent they are not currently at levels required by statute, consent decree or other regulatory obligation, and; (c) ensure those reserves are not counted as equity for the purposes of the debt/equity ratio outlined above; and
Counterparty risk from these holding companies is minimized.
The letter was signed by Representatives Mike Levin (CA-49), Jared Huffman (CA-02), and Denny Heck (WA-10).