The U.S Federal Reserve is weighing further restrictions on banks’ trading and warehousing of physical commodities as Congress scrutinizes potential conflicts of interest and manipulation in those markets.
The Fed Wednesday sought comment on 24 questions, including some on the risks posed by bank ownership and trading of commodities such as oil, gas and aluminum by deposit-taking banks and the possible benefits of imposing additional capital standards.
“There has been a substantial increase since 2008 in the amount and types of commodities activities conducted by the firms we supervise,” Michael Gibson, the Fed’s director of bank supervision, said in testimony prepared for a Senate subcommittee hearing. “Moreover, recent catastrophic events involving physical commodities have increased concerns regarding the ability of companies to mitigate potentially extraordinary tail and other risks.”
The Fed said it is considering whether additional restrictions are needed to ensure physical commodities activities by banks are conducted in a safe and sound manner. The central bank said it will consider whether further rules are needed after the public comment period ends on March 15.
In its notice, the Fed cited a list of recent accidents and natural disasters, including the 2010 Deepwater Horizon drilling rig explosion that cost BP Plc more than $42 billion through the end of 2012, as examples of catastrophic events posing risk to exposed institutions.
The Fed’s action could increase pressure on Goldman Sachs Group Inc. and Morgan Stanley to sell commodities businesses. Although the Fed generally forbids bank holding companies to own or trade physical commodities, the two Wall Street firms were permitted to retain units after they converted into banks during the 2008 financial crisis.
Commodity trading revenue at the 10 largest global investment banks fell 18 percent in the first nine months of 2013 to $4 billion, industry analytics firm Coalition Ltd. said in a report this month.