MS Morgan Stanley

By Ryan Tracy 

Two U.S. financial regulators on Thursday made a significant push to impose new limits on banks' commodity-market activities, which have been under scrutiny for years.

The Federal Reserve asked Congress to repeal banks' authority to make a range of investments in nonfinancial businesses, saying the businesses put the firms' safety and soundness at risk.

Separately, the Office of the Comptroller of the Currency, which regulates federally chartered national banks, proposed to prevent national banks from dealing or investing in metals such as copper. That reversed a previous regulatory policy that had allowed copper trading.

The Fed said lawmakers should ban banks from making "merchant banking" investments, which involves investing in and potentially owning nonfinancial companies. Congress should also repeal a provision of a 1999 law that allows Goldman Sachs Group Inc. and Morgan Stanley to store, extract and transport commodities, even though other banks are barred from doing so, the Fed said.

The Fed's recommendations came in a report required by the 2010 Dodd-Frank regulatory-overhaul law and were approved unanimously by the Fed's five-member governing board in Washington.

Fed officials had previously questioned the risks of merchant banking, but hadn't endorsed banning it. They had talked publicly about repealing the "grandfather" provision governing Goldman Sachs and Morgan Stanley, but the Fed's board hadn't formally endorsed doing so -- until now.

The report gives the recommendations momentum, though Congress likely won't act on them this year.

A Morgan Stanley spokesman declined to comment. A spokesman for Goldman Sachs had no immediate comment.

Many large banks have already significantly scaled back their commodities businesses as the result of regulatory scrutiny.

In November 2014, a bipartisan report by the Senate Permanent Subcommittee on Investigations found banks had amassed a powerful position in commodities markets that allowed them to exert unfair influence. The report also highlighted how some banks had expanded into risky activities such as mining and oil transport, and accused regulators of weak oversight.

Write to Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

September 08, 2016 16:04 ET (20:04 GMT)

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