WASHINGTON—The Federal Reserve proposed Friday new restrictions on banks' activities in physical-commodity markets such as aluminum and oil, aiming to minimize risks an environmental catastrophe could pose on the financial institution.

The regulations would require certain firms to hold additional capital to cover their liability risks and to place limits on the amount of trading activity firms can conduct. It would also revoke firms' ability to engage in physical commodities tied to power plants and prohibit institutions from owning or storing copper.

The rules would likely hit Goldman Sachs Group Inc. hardest, especially as most other banks have done more to pull out of such businesses.

The move follows high-profile congressional probes on whether banks were wielding outsize power over certain markets, as well as regulatory concerns that banks trading in such markets could be put at risk by their commodity businesses.

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 public will be given 90 days to comment on the proposal. The deadline is Dec. 22, and the rule would take effect after that.

The proposal gives a sense of what the Fed's worst fears are: An oil spill, mine explosion or power-plant meltdown at a bank-owned facility that triggers a ripple effect of fines, cleanup costs and loss of investor confidence that could take down a financial institution.

Goldman Sachs Group Inc. last year sold a Colombian coal-mining business that had been beset by labor and environmental problems, and in 2014 sold a group of metals warehouses.

As part of the proposal, the Fed would impose an unusually steep 1,250% capital charge on Goldman and Morgan, which had been given extra flexibility to trade in these areas under as sweeping 1999 financial deregulation law.

The 1,250% ratio is one of the most-punitive ratios implemented by the Federal Reserve, and—especially against the backdrop of a continuing commodities slump—may end up pushing the banks out of their remaining businesses.

Goldman is likely to be most affected, since it has held tighter to commodities than rivals, for example becoming a force in natural-gas marketing. Both Chief Executive Lloyd Blankfein and his second-in-command, Gary Cohn, came up through the ranks of the commodities business.

Goldman's finance chief, Harvey Schwartz, said last year that the bank was "hugely committed" to commodities, and said the swoon in energy prices showed how important it was for banks to be able to make markets.

"I think it really reinforces the need for firms like Goldman Sachs to be in a position to provide our clients with liquidity, with financing capacity," he said. "we've been in the commodity business forever. We know how valuable it is to our clients. We're hugely committed to it."

Write to Donna Borak at donna.borak@wsj.com and Liz Hoffman at liz.hoffman@wsj.com

 

(END) Dow Jones Newswires

September 23, 2016 15:45 ET (19:45 GMT)

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