The US Federal Reserve wants to put new limits on big banks’ activities in physical commodities businesses, with an eye to reducing financial risks from volatile trading and transport of sensitive materials.
The Fed’s governors are proposing restrictions for banks’ holding, transporting and trading of commodities like oil, aluminum and coal. Banks would be required to beef up the capital they hold against potential losses in commodities and would face limits on the amount of their commodities trading.
The Fed is opening the proposal to public comment for 90 days.
Wall Street banks have sharply reduced their involvement in physical commodities in recent years, under pressure from regulators and lawmakers. The biggest players in the field have been Goldman Sachs Group Inc and Morgan Stanley.
Regulators say disasters like the massive 2010 oil spill in the Gulf of Mexico show the potential risks to banks. Though that accident only affected BP PLC and the oil-service companies involved, banks that engage in transport of oil in tankers could take heavy financial hits, the regulators say.
Also, critics of Wall Street say that owning and storing commodities like aluminum in warehouses or oil in storage tankers enables banks to drive up prices for basic products made from them — like gasoline, canned soft drinks and beer, and electricity.
“As a general matter, [major banks] should be prohibited from owning physical assets like warehouses, pipelines and tankers,” Democratic US senators Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts have told the Fed.
Business interests say they are concerned about the Fed’s proposal. Reducing the number of players in commodities markets by forcing out banks could raise costs for businesses that use the commodities and need to hedge against price swings, the US Chamber of Commerce said.
There could be less money sloshing around in the financial markets, making it harder for the businesses to make trades for hedging, Chamber executive Tom Quaadman said in a statement. The Fed should have done a “robust economic analysis” of the proposal, he said.
The proposed new requirements would mean banks would have to salt away a total of up to US$4 billion in additional capital, Fed officials estimate.
In addition, banks would no longer be allowed to engage in physical activities involving power plants. Banks no longer could own and store copper, because regulators now deem copper to be an industrial metal, rather than a precious metal like gold and silver.
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