The US Federal Reserve Board may rule as soon as early October whether bank holding companies can continue to own physical assets such as power plants, pipelines and and storage facilities and whether they can continue to trade commodities such as wholesale electricity, natural gas, crude oil and refined products and metals, banking and government sources said.
A ruling by the Fed that would force big domestic and foreign banks out of the physical commodities business is being supported by some in Washington, who worry that the banks have are exercising too much influence in global commodity markets.
The Fed in late July said it would review the 2003 rules it used to grant banks permission to trade physical commodities as a complement to their financial trading. The review has not been completed, a Fed spokesman said.
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But a number of bank sources have said they expect the review will be completed before the US Senate Subcommittee on Financial Institutions and Consumer Protection meets again to consider the issue. The panel had scheduled a hearing for September 24, but that was canceled and has yet to be rescheduled. The sources said they expect the Fed decision to come no later than early October.
At a July 23 hearing, the subcommittee, chaired by Senator Sherrod Brown, Democrat-Ohio, heard from a series of witnesses who criticized the role of banks in commodity markets.
At the hearing Brown said Congress is looking at both financial institutions and the actions of federal regulators in trying to determine whether new laws are need to avoid a banking crisis.
"Are the laws and regulations sufficiently stringent and transparent, and are regulators enforcing them aggressively enough?" Brown asked at the hearing. "And what do we want our banks to do -- make small business loans or refine and transport oil? Issue mortgages or corner the metals market?"
The senator wa particularly critical of the Fed, which, he said, has not been forthcoming about its own regulatory approach to the issue.
"There has been little public awareness of, or debate about, the massive expansion of our financial institutions into new areas of the economy," Brown said. "That is, in part, because regulators have been less than transparent about the basic facts, about their regulatory philosophy and about their future plans."
The July hearing came four days after the Fed in a one-line statement said it "regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies."
The Fed later said its criteria for allowing banks to trade a physical commodity is based on whether the bank also is engaged in trading financial instruments for the same commodity. The Fed has said that the physical trading must be complementary to the financial trading.
A number of major banks have received Fed approval to trade physical commodities since 2003, including Citigroup, UBS, Barclays, JP Morgan Chase, Deutsche Bank, Societe Generale, Fortis, Wells Fargo, BNP Paribas, Credit Suisse, Bank of America Merrill Lynch, Scotiabank, Royal Bank of Scotland.
1999's Gramm-Leach-Bliley Financial Services Modernization Act -- which effectively repealed the Depression-era Glass-Steagall Act that had limited commercial banks' activities -- allowed banks to expand into non-financial activities, such as commodity trading. The law provided exemptions to what were then two noncommercial banks -- Morgan Stanley and Goldman Sachs -- that allowed them to own non-financial assets.
While the Fed has been mum on what its review may recommend, several long-time banking sources said they believe the central bank will almost have to take some action given the political pressures building over the issue.
Some banking sources believe the best that can be hoped for may be that the Fed will disallow bank ownership of physical commodities, but permit them to continue to trade physical commodities.
Under such a decision, a bank like Goldman Sachs may, for example, be forced to sell off its network of metals warehouses, while its trading arm J Aron, continues to do business in commodity markets.
If the Fed pursues this course, the sources said, Morgan Stanley might have to divest the Denver-based oil products storage and transport firm, TransMontaigne, which it acquired in 2006, but would be able to continue to be a force in commodity trading.
--Jeffrey Ryser, firstname.lastname@example.org
--Edited by Jeff Barber, email@example.com