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Fed wants to put new limits on banks' commodities activities

Published:Sunday | September 25, 2016 | 12:00 AM

The United States 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, aluminium 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 and Morgan Stanley.

Potential risks

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 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 aluminium in warehouses or oil in storage tankers enables banks to drive up prices for basic products made from them - like gasolene, 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 Senators Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts have told the Fed.

The proposed new requirements would mean banks would have to salt away up to $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.

- AP