investments, including restrictions on the authority of a financial holding company to routinely manage or operate a merchant banking portfolio company and a requirement that merchant banking investments be held only for a limited period. to implement these restrictions, the board adopted regulations in 2001 that require merchant banking investments to be disposed of within 10 years after purchase ( or 15 years for investments made through a qualifying private equity fund ), and that limit the officer and employee interlocks between financial holding companies and portfolio companies. these restrictions were designed to help ensure that merchant banking investments generally are passive investments and limited in duration. a third provision in the glb act permits certain companies to engage in a broad range of physical commodities activities. section 4 ( o ) of the bank holding company act authorizes a company that was not a bank holding company and becomes a financial holding company after november 12, 1999, to continue to engage in activities related to the trading, sale, or investment in commodities that were not permissible activities for bank holding companies if the company was engaged in the united states in any of such activities as of september 30, 1997. 11 in contrast to section 4 ( k ) complementary authority, this authority is automatic – meaning no approval by or notice to the board is required for a company to rely on this authority for its commodities activities. also, unlike the firms conducting limited commodities activities found to be complementary to financial activities under section 4 ( k ), the section 4 ( o ) grandfathered firms are authorized to engage in the transportation, storage, extraction, and refining of commodities. moreover, while the cap on complementary activities under section 4 ( k ) is 5 percent of tier 1 capital, commodities activities permitted under the section 4 ( o ) grandfather provision may represent up to 5 percent of the company ’ s total consolidated assets. only two financial holding companies currently qualify for these grandfather rights – goldman sachs and morgan stanley. during 2008, both goldman sachs and morgan stanley became bank holding companies and elected financial holding company status. they each claim the right to conduct commodities activities under the grandfather provision found in section 4 ( o ). in addition, during this same period, j. p. morgan chase & co. acquired bear stearns and bank of america corporation acquired merrill lynch ; both bear stearns and merrill lynch engaged in a substantial amount of commodities trading activities. however, the range of permissible physical commodities activities of these latter two financial holding companies is limited because they are not grandfathered under section 4 ( o ). federal reserve supervision of

make decisions and take actions with incomplete knowledge about the condition of their counterparties. cre concentration risk while credit quality has been very good in recent years in the u. s., regulators are concerned about some emerging practices. one example is commercial real estate ( cre ) in the united states, an area in which some banks have become increasingly concentrated. in fact, the aggregate cre concentrations for small - to - medium - sized u. s. banks, relative to capital, are now twice the exposures before the substantial real estate downturn in the late 1980s. as supervisors, we want to ensure that risk management practices and capital levels are appropriate given the level of concentrations, and that institutions have thought through the possible consequences of a market downturn in cre. u. s. regulators recently issued for comment proposed new guidance for examiners on cre. historically, cre has been a highly volatile asset class. borrowers and bankers with properties in distress can disrupt their local real estate market by cutting rents or offering leasehold improvements and other incentives to attract or keep tenants in an effort to generate cash flow. this can negatively affect the local real estate market as a whole, and adversely affect even good projects. cre is a highly volatile asset class in that credit losses in most years are relatively low compared with many other types of bank loans. but in times of stress, the loss rate on cre can jump considerably higher relative to the good years, compared with the behavior of other types of loans. as banks'concentration of cre grows, they must upgrade their portfolio risk management practices, especially monitoring proposed projects and conditions in the sector of the cre market in which they are lending. since cre losses tend to cluster in times of stress, bankers must focus more intently on their risk appetite for losses as their concentration grows. this means considering how much capital can be placed at risk if the portfolio of cre loans hits a stress period and comparing that loss exposure to the relative returns in cre lending. as banks increase their concentration in cre, supervisors will expect to see bankers pay greater attention to strengthening their portfolio risk management practices. improving bank capital measures of course, banking is, and should be, a business in which banks take and manage risks. bankers implicitly accept risk as a consequence of providing services to customers and also take explicit risk positions that offer profitable returns relative to their risk appetites. the job of bank supervisors is to ensure that bank capital represents an