Fed rethinking move allowing banks to trade physical commodities

Sat Jul 20, 2013 4:47pm EDT
 
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By David Sheppard and Josephine Mason

NEW YORK (Reuters) - The Federal Reserve is "reviewing" a landmark 2003 decision that first allowed regulated banks to trade in physical commodity markets, it said on Friday, a move that may send new shockwaves through Wall Street.

The one-sentence statement suggests the Fed is taking a much deeper, wide-ranging look at how banks operate in commodity markets than previously believed, amid intensifying scrutiny of everything from electricity trading to metals warehouses.

While the Fed has been debating for years whether to allow banks including Morgan Stanley (MS.N: Quote) and JPMorgan (JPM.N: Quote) to continue owning assets like oil storage tanks or power plants, Friday's surprise statement suggests it is also reconsidering whether all bank holding firms should be able to trade raw materials such as gasoline tankers and coffee beans.

By referencing its initial decision a decade ago permitting Citigroup's Phibro unit to trade oil cargoes - setting a precedent for a dozen more banks that followed suit - the Federal Reserve has put in question a key profit center for Wall Street's top players, which have already seen multibillion-dollar commodity revenues shrink in the face of new regulations.

On Tuesday, the Senate Banking Committee is holding its first hearing on the issue, asking whether so-called "Too Big to Fail" banks should be taking on additional risks like moving tankers of crude oil or operating power plants.

Amid growing frustration in Washington over regulators' failure to push through new rules five years after the financial crisis, the Fed's widening area of enquiry came as a shock.

"They must be feeling some pressure on this issue if they've felt compelled to issue a public statement," said Saule Omarova, associate professor of law at the University of North Carolina at Chapel Hill School of Law, who will appear at the hearing.

"Are they using this opportunity to in fact review the entire position of banks in physical commodity markets?"   Continued...

 
A view shows an eagle sculpture on Federal Reserve building in Washington August 22, 2012. REUTERS/Larry Downing