Casten Introduces Legislation to Mitigate Risk Financial System As Oil and Gas Markets Face Turmoil
Downers Grove, IL – On Friday, U.S. Representative Sean Casten (IL-06) introduced H.R. 7046, a bill to mitigate systemic risk to the financial system due to increased volatility in oil gas prices and the subsequent impacts to exploration and production (E&P) company balance sheets. Casten also led a letter to Federal Reserve Chair Powell and the Commodities and Futures Trading Commission Chair Tarbert urging them to take action on this issue earlier this month. This bill would mitigate systemic risk by eliminating financial holding companies' "merchant banking" authority and codifying the Federal Reserve's 2016 proposed rule on commodities ownership, which required financial holding companies to hold additional capital against risky commodities ownership.
This bill is necessary to ensure that as the economic impacts of the novel coronavirus (COVID-19) on highly leveraged E&P firms do not spread throughout the financial system. As a result of COVID-19, demand for oil and gas has plummeted and oil prices have sharply declined. Due to falling prices and a lack of cash flow, some of the most highly indebted E&P firms have been driven into bankruptcy, and more will surely follow. All of these conditions have seemingly necessitated a transfer of production asset ownership to existing creditors, at a rate and scale that could prove to be disruptive to credit and commodity markets without the protections of H.R. 7046.
Casten said, "Just as our health and livelihoods are at stake, the health of our financial system is also at stake. The recent oil industry crisis demonstrated the global pandemics' rippling economic consequences—from plummeting demand, to negative prices and the wave of energy sector bankruptcies that is only beginning to unfold.
"But, because no sector exists in a vacuum, this industry-wide reliance on excessive, high-yield debt has the potential to upend credit and commodities markets at across the board at a time when the prices of virtually all commodities are already in decline.
"Democrat or Republican, protecting the American economy should be a given. My bill takes a commonsense solution—originally proposed by the bipartisan Federal Reserve Board of Governors—to defend our financial system and the American people against further devastation."