The Federal Reserve is poised to take a preliminary step toward limiting banks’ activities with commodities amid congressional scrutiny, according to three people briefed on the discussions.
The Federal Reserve is planning to release a notice seeking information on ways to curb banks’ ownership and trading of some commodities as it tries to cut risk for deposit-taking banks, said the people, who requested anonymity because the talks are private. Regulators and lawmakers have said raw-materials assets could lead to catastrophic losses, collapses and public bailouts.
A Senate Banking subcommittee has set a hearing on the issue for tomorrow, the second such hearing on the topic. Senator Sherrod Brown, an Ohio Democrat, has raised concerns that banks may have a conflict of interest when they own and trade both physical commodities and instruments tied to them.
Fed spokeswoman Barbara Hagenbaugh declined to comment. The Fed is weighing whether to extend some legal and regulatory exemptions that allow banks to participate in the commodities markets, a person briefed on the process said in October.
U.S. law restricts banks from owning non-financial businesses unless they get special exemptions. Goldman Sachs Group Inc. and Morgan Stanley were the two biggest U.S. securities firms until they converted into banks in 2008. A 1999 law “grandfathers” any commodities operations they had before Sept. 30, 1997.
The Fed said in July that it’s reconsidering a 2003 decision to grant some lenders, such as Citigroup Inc. and JPMorgan Chase & Co., permission to expand into raw materials.
Banks have already announced plans to exit parts of the business. Bank of America Corp. announced on Jan. 7 that it would exit power and natural-gas markets in Europe. Morgan Stanley agreed in December to sell a unit that stores and transports oil products to a subsidiary of Russia’s OAO Rosneft. The sale of the global oil merchanting business is expected to be completed this year, New York-based Morgan Stanley said in a statement.
JPMorgan Chase & Co., whose commodities units are overseen by Blythe Masters, said in July it may exit businesses after the Fed announced its review. The largest U.S. bank could sell or spin off holdings including warehouses, stakes in power plants and trading in materials such as gas and coal. The New York- based firm said it will continue trading commodity derivatives as well as storing and trading precious metals.
The Fed is soliciting comments and other input before regulators take a position on a potential rule. The Fed has issued these preliminary notices before, including for a credit- ratings rule in 2010 and capital rules in 2003. After gathering outside views, the agency could then propose a rule and open that for comments, too, before issuing a final version.
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.