Concerns Raised Over Banks' Commodities Holdings

Jan 16, 2014
Originally published on January 16, 2014 3:07 pm
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Big banks' control of commodities, like aluminum and oil, is drawing more scrutiny. The Federal Reserve is considering restricting banks' ability to trade and warehouse physical commodities. And as NPR's Yuki Noguchi reports, Democrats on the Senate Banking Committee believe the Fed isn't moving fast enough.

YUKI NOGUCHI, BYLINE: Under normal circumstances, the Fed bars bank-holding companies from trading or owning commodities. The idea is, a bank might be able to hoard a commodity to lower the supply and force up the price. But when Goldman Sachs and Morgan Stanley became holding companies during the financial crisis, they were permitted to grandfather in their existing commodity trading operations.

And that is raising concerns - especially among Democrats - that this could lead to problems for both consumers and companies that rely on those commodities. Here, Oregon Democrat Jeff Merkley.

SEN. JEFF MERKLEY: Would you say this is a good policy to allow these two activities to take place, where a firm with enormous assets can control the supply and demand of a product while at the same time, trading on the product?

NOGUCHI: Norman Bay, director of enforcement at the Federal Energy Regulatory Commission, says there is a potential cost to that kind of set-up.

NORMAN BAY: Anytime there's fraud or manipulation, there is an impact on the end user. And invariably, that cost is borne by consumers.

NOGUCHI: Ohio Democrat Sherrod Brown raised another issue. In light of disasters like the Exxon Valdez or BP oil spills, what's the risk to the safety and soundness of the financial system if big banks are on the hook to clean up such disasters?

SEN. SHERROD BROWN: You know, if it's owned by an oil company - it's an oil tanker - and there's a terrible problem, that's tragic for everybody involved. But it doesn't have the potential damage to our economy. These do.

NOGUCHI: The Fed is soliciting public comment on new restrictions through March 15th. But some banks are already selling off their commodities units ahead of any new rules.

Yuki Noguchi, NPR News, Washington. Transcript provided by NPR, Copyright NPR.