Agencies Issue Report and Propose Action to Limit Bank Activities

The Federal Reserve, FDIC and OCC today issued a long-awaited report mandated by Section 620 of the Dodd-Frank Act in which they called for sweeping changes to banks’ powers. Notably, the Fed recommended that Congress repeal the following: merchant banking authority for financial holding companies; grandfathered authority for physical commodities activities for certain FHCs; regulatory exemptions for industrial loan companies; and regulatory exemptions for grandfathered unitary savings and loan holding companies.

The Fed said it believes that “the existing statutory merchant banking authority enables FHCs to engage in activities that pose risks to the organizations’ safety and soundness,” adding in a footnote that it is “considering regulatory measures” to limit risks it associates with merchant banking authority independent of any action Congress might take.

ABA and other financial trade groups roundly opposed the “unfortunate and ill-considered” merchant banking recommendation. “For the last 15 years, bank holding companies have successfully used the merchant banking authority granted to them by law to finance startups and growing companies, fueling jobs and economic growth,” the groups said. “The regulators have made these recommendations without pointing to any evidence that these activities have ever posed any problem, and have made no attempt to assess the costs to businesses and jobs.”

As part of its Section 620 review, the OCC issued a proposed rule today that would prohibit national banks from dealing or investing in industrial and commercial metal. The rule — which would exempt the buying and selling of exchange, coin and bullion — would principally target bank involvement in the copper market, which was permitted under an OCC interpretive letter issued two decades ago. Comments are due on the proposal 60 days after it is published in the Federal Register.

The OCC also said it would clarify minimum prudential standards for national banks engaged in swap dealing, review risks posed to banks by membership in clearinghouses, update its investment securities regulations to reflect restrictions in the Volcker Rule, issue guidance or propose regulations to address concentration in mark-to-model assets and liabilities and reconsider whether to allow national banks to hold asset-backed securities as Type III securities. American Bankers Association staff will thoroughly review the recommendations and provide appropriate feedback to the agencies. For more information, contact ABA’s Hu Benton, Shaun Kern or Jason Shafer.