Tags: Federal Reserve | Rules | Wall Street | Commodity Businesses

Fed Plans to Stiffen Rules for Wall Street Commodity Businesses

Friday, 21 November 2014 10:27 AM

The Federal Reserve may force banks to boost capital for their commodities businesses and improve disclosures after a Senate investigation found Wall Street’s role in energy and power markets could threaten financial stability.

In prepared remarks for a Senate hearing Friday, Fed Governor Daniel Tarullo said banks control over assets such as oil, coal, aluminum and uranium poses “unique risks” that the central bank is seeking to rein in. The Fed plans to move forward on new regulations next year, he said.

“We are exploring measures such as additional capital requirements, enhanced risk-management requirements, and additional data collection and reporting requirements on physical commodities activities to help ensure that such activities do not pose undue risks,” Tarullo said.

This week, a Senate panel released findings from a two-year investigation that concluded Wall Street’s role in owning commodities provided unfair trading advantages and could threaten the financial system if a bank’s business suffered an industrial catastrophe. Tarullo faces questions over why the central bank allowed lenders to erode what was once a strict line separating banking from commercial activities.

The Fed has drawn criticism from senators who allege it engaged in weak oversight over the last decade as banks expanded into new businesses involving aluminum warehouses, coal mines and trading in electricity and uranium.

“You’ve got to restore the separation,” U.S. Senator Carl Levin, said in an interview yesterday after he grilled executives from Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley at a hearing in Washington. “It’s gone way too far this integration. I don’t like the idea, frankly, of these banks being in physical commodities.”

The Senate Permanent Subcommittee on Investigations’ 400-page report said the Fed has “a current lack of effective regulatory standards” and an “uncoordinated, incoherent patchwork” of limits on banks.

A bank shouldn’t “ever be able to corner 80 percent of the world’s supply of any commodity and that should have come to the attention of the regulators,” Senator John McCain, the panel’s senior Republican, said in an interview. “We pass laws that appoint those regulators and obviously they didn’t choose to act.”

At the hearing, Levin sparred with Goldman Sachs executives for more than two hours over aluminum trading contracts between a bank warehouse subsidiary and clients. Levin said the deals led to long wait times for customers to get their aluminum out of warehouses, leading to consumers paying higher prices for the metal.

Jacques Gabillon, head of Goldman Sachs’s global commodities principal investments group, rejected the accusation.

“When everything is said and done, you can say there is no correlation” between wait times and price, Gabillon said.

Levin, a Michigan Democrat, responded that the executives were “in a very different mathematical world” if they wouldn’t acknowledge the connection.

Catastrophic Losses

The Senate report referenced a 2012 Fed study of four banks that found each had capital and insurance shortfalls for commodity units of as much as $15 billion. That meant that if each bank experienced a catastrophe on the scale of BP Plc’s 2010 oil spill in the Gulf of Mexico, they couldn’t cover the losses, the report said.

The Fed, as part of its consideration of new limits on the businesses, is weighing regulations for extra capital and insurance for banks’ commodity businesses.

Banks have moved to sell commodities units amid the scrutiny and revenue from the businesses has tumbled by two- thirds from peak years.

Goldman Sachs produced $1 billion of revenue from its commodities unit and investments in commodity businesses in 2012, down from $3.4 billion in 2009, according to the Senate report, while Morgan Stanley’s commodity revenue fell for four straight years, from $3 billion in 2008 to $912 million in 2012.

Goldman Sachs said it is looking to sell the warehouse subsidiary and will wind down an uranium-trading unit after the bank didn’t receive acceptable bids when it put the business up for sale. The bank is also considering selling coal mines in Colombia, according to the report.

Meanwhile, JPMorgan has been selling off large portions of its physical commodities business.

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The Federal Reserve may force banks to boost capital for their commodities businesses and improve disclosures after a Senate investigation found Wall Street's role in energy and power markets could threaten financial stability.
Federal Reserve, Rules, Wall Street, Commodity Businesses
Friday, 21 November 2014 10:27 AM
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