A limited number of firms supervised by the Board engage in physical commodity activities and investments. Some firms are permitted by law to engage in a broad range of physical commodity activities, including the extraction, storage, and transportation of commodities. Others may engage in more limited activities, such as commodities trading. The possibility of an environmental accident due to these activities presents significant risks to the firms.Based on a broad review of firms' physical commodity activities as well as comments received on the Board's 2014 advance notice of proposed rulemaking on this matter, the proposed rule would:Require firms to hold additional capital in connection with activities involving commodities for which existing laws would impose liability if the commodity were released into the environment;Tighten the quantitative limit on the amount of physical commodity trading activity firms may conduct;Rescind authorizations that allow firms to engage in physical commodity activities involving power plants;Remove copper from the list of precious metals that all bank holding companies are permitted to own and store; andEstablish new public reporting requirements on the nature and extent of firms' physical commodity holdings and activities.
What’s unstated is that the proposal also addresses years of criticism that banks could seize unfair advantages in metal and energy markets by owning hard assets and operating huge trading desks at the same time.The proposal comes on the heels of a Fed recommendation made earlier this month that big banks should be barred from buying stakes in non-financial companies -- a removal of merchant-banking abilities that Congress would have to initiate. Merchant banking will also face higher capital under the Fed’s proposal.Together, the recommendations are part of the central bank’s broad goal to rein in how Wall Street invests its money outside of traditional lending. The effort stems in part from a 2014 Senate investigation that probed the industry’s sometimes controversial dealings in physical commodities, such as operating mines, warehousing aluminum and shipping oil.That Senate probe accused Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. of using their ownership of metals and other physical commodities to dominate markets and gain unfair investing advantages. The physical commodities businesses at Goldman Sachs and Morgan Stanley were protected by grandfathering that allowed them wider abilities than most banks -- an advantage the Fed is seeking to curtail by putting a 1,250 percent risk weight on the assets they could hold under that grandfathering.
Regulators have cited disasters like the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the 2011 Fukushima Daiichi nuclear-plant meltdown in Japan, and the fatal 2010 Pacific Gas & Electric Co. natural-gas pipeline explosion in San Bruno, Calif., as examples of risks that could potentially destabilize the financial system if a bank were involved and subject to legal action.The central bank has long telescoped its plans and, in anticipation, big banks have been preparing for new and potentially tougher restrictions. Morgan Stanley once held enough oil to supply the entire country for three days, a U.S. Senate report found, and once owned a 49% stake in a fleet of tankers. It exited those businesses last year.J.P. Morgan Chase & Co. said in July 2013 it would sell its physical-commodity units. Goldman sold Metro Trade Services, a group of metals warehouses, in 2014 following claims from a U.S. Senate investigation that it had hoarded supply and inflated pricing, allegations the bank denied.
The 1,250 percent risk weighting basically means about $1 in capital would be needed for every $1 in investment.For banks other than those eligible for grandfathering, they’ll face 300 percent risk weighting for physical commodities -- meaning they’d have to maintain triple the capital a bank needs to back up construction loans or corporate debt, for instance. The agency said its aiming for a “level of capitalization for such activities that is roughly comparable to that of nonbank commodities trading firms.”Meanwhile, banks that were once big players in physical commodities have shied away. Morgan Stanley sold off its oil business last year and backed away from industrial metals trading, and JPMorgan shed a big part of its physical commodities business in 2014. While Goldman Sachs dumped a coal-mining operation in 2015, Chief Executive Officer Lloyd Blankfein has maintained that commodities trading is a “core” part of his firm’s business.
Two weeks ago, the Fed and other banking regulators released a report that made several recommendations about restricting the industry’s dabbling in commodities beyond their usual trading activity. The Fed’s section called for Congress to ban merchant banking, the practice of investing in companies instead of lending them money, in which Goldman Sachs has been a leader.Merchant banking and commodities activities are cousins, because they both involve banks chasing returns outside of their customary businesses. But unlike the Fed’s new proposal on commodities, the merchant banking restriction would require intervention from lawmakers -- a challenge in a politically-divided Congress that has passed only a few significant bills affecting the financial system in recent years.Friday’s proposed rule -- which like an earlier proposal from the Office of the Comptroller of the Currency will limit banks’ holdings of copper by no longer considering it a precious metal -- will be open for public comments for 90 days.The leading banks have been responding to mounting pressure for years.
In 2014, Goldman Sachs sold metals warehousing unit Metro International Trade Services LLC that had become a lightning rod for criticism. Last year, the firm sold a port in Colombia and two coal mines in the Latin American nation, with the mine sales marking the end of operations at Goldman’s commodities principal investments group, which over 35 years invested in everything from mines to oil refineries, power plants and metals warehouses. But the lender has continued trading commodities, and held onto the title of largest bank by commodities revenue in the first half of the year, according to London-based analytics firm Coalition. The firm wrested the No. 1 position from JPMorgan Chase & Co. in 2014 as its rival took steps to exit certain commodities activities. “Our commodities activities, particularly our physical commodities activities, subject us to extensive regulation and involve certain potential risks, including environmental, reputational and other risks that may expose us to significant liabilities and costs,” Goldman Sachs disclosed earlier this year.
thanks for the Friday data dump