The Federal Reserve is seeking input from the banking industry on how it should regulate banks in commodity markets. This comes as the Senate’s banking committee is holding a hearing to discuss ways to limit Wall Street’s role in the physical commodities markets. The major policy shift comes after a growing controversy over claims that banks are “using their foothold” in the market to influence supply flows and prices, and conflicts of interests for banks. In July, the Fed publically announced a “review” of its 2003 authorization that first allowed commercial banks like Citigroup to handle physical commodities.
“Each day that we wait to rein in these activities means that end users and consumers will pay higher commodity and energy prices, and taxpayers will continue to be exposed to excessive risks at Too Big to Fail banks,” Senator Sherrod Brown (D.-Ohio), who is leading the hearing, said.
For the first time, the Fed sent out a preliminary notice to issue in which its posing questions and requesting ideas on how bank oversight in the physical commodity markets. The changes to policy would be monumental, and could sidestep a patchwork of legal permissions and waivers that have allowed banks to operate in the markets for the last decade.
The Wall Street Journal reported in October that the Fed is considering imposing a capital surcharge on banks that own physical commodity assets such as pipelines and warehouses. By imposing higher capital costs on such properties, the Fed could prompt banks to scale back their holdings of such assets.
Just as the Fed is re-visiting its regulations, some banks are already preparing new rules. Back in July, J.P. Morgan Chase & Co. announced that it would sells its physical commodity units, and “narrowed its field of bidders for the assets to a final handful of parties.” Goldman Sachs has also considered offers for certain units.
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