Business World

Wednesday 13 December 2017

Worried Fed seeks to curb Wall Street trade in 'risky' commodities

BP’s Deepwater Horizon oil spill in 2010. REUTERS/US COASTGUARD
BP’s Deepwater Horizon oil spill in 2010. REUTERS/US COASTGUARD
BP’s Deepwater Horizon oil spill in 2010. REUTERS/US COASTGUARD

Anna Louie Sussman and Emily Stephenson

THE US Federal Reserve has taken a first formal step towards restricting the role of Wall Street banks in trading physical commodities, citing fears that a multibillion-dollar disaster could bring down a bank and imperil the stability of the financial system.

The Fed board voted to publish its concerns and potential remedies following months of growing public and political pressure to check banks' decade-long expansion into the commodities supply chain. The Fed also questioned the initial rationale for allowing them to trade and invest in risky raw materials and lease oil tanks or own power plants.

The Fed "expects to engage in additional rule-making in this area", Michael Gibson, the Fed's director of bank supervision and regulation, told a US Senate banking committee hearing yesterday.

The new rules could include a cap on total assets or revenues from such trading, increased capital or insurance, or prohibitions on holding certain types of commodities "that pose undue risk".

Facing a clearly uneasy regulator, some banks, including JPMorgan Chase & Co, are already quitting the business, a once-lucrative trading niche that has reaped billions of dollars of revenue for Wall Street over the years but is now facing diminished margins and stiffer capital rules.

But others -- such as Goldman Sachs -- have stood firm, defending an operation they say benefits customers.

In a 19-page document that included two-dozen questions, the Fed offered a host of reasons for imposing new restrictions in the interests of limiting potential conflicts of interest and protecting the safety and soundness of the banking system.

It invoked disasters including BP's oil spill in the Gulf of Mexico in 2010 and the derailment and explosion of an oil train in Canada last year.

It is the Fed's first detailed public comment since it shocked the banking industry last July by announcing a "review" of its 2003 authorisation that first allowed commercial banks such as Citigroup to handle physical commodities.

US senator Sherrod Brown of Ohio, who led the first hearing last summer, said the measure was "overdue and insufficient", warning that consumers and end-users risked paying higher commodity prices until new curbs were imposed.

But others saw it as a likely prelude to tough action that would curtail so-called "too big to fail" banks amid a wider political move to restore the historical division between commercial banking and riskier business.

Eliminating that divide 15 years ago helped open the door to commodities trading.

"That was the Greenspan era, and it was anything goes as far as activities. Now, we realise that we made a lot of mistakes during the Greenspan era," said Cornelius Hurley, former assistant general counsel to the Fed Board of Governors.

Irish Independent

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