WASHINGTON--Bank regulators are expanding their examination of
bank activities in commodities markets, a senior Federal Reserve
official plans to tell Congress Friday.
Fed governor Daniel Tarullo, who will testify before the Senate
Permanent Subcommittee on Investigations, will provide details of
the Fed's review of the activities of banks in trading and holding
commodities. The Fed is weighing a proposal that could impose
restrictions on banks' activities in physical-commodity markets
such as aluminum, copper and oils.
The Fed has become concerned that banks' commodities ownership
has expanded beyond what regulators originally envisioned and could
pose risks to the firms and the broader financial system.
One concern is that banks are holding commodities with the
intent of moving prices in ways that benefit the firms' trading
positions. Mr. Tarullo said the Fed is planning to weigh whether it
needs to apply added restrictions "to ensure that the investments
are truly passive."
The Fed is also exploring other measures, such as additional
capital requirements, risk-management requirements and expanded
data-collection and reporting requirements on physical commodities,
Mr. Tarullo plans to say.
The comments come a day after executives at three of Wall
Street's biggest banks were grilled at a Senate hearing examining
whether their commodities business wielded unfair market power or
posed risks to the financial system. Sen. Carl Levin (D., Mich.),
chairman of the subcommittee, accused witnesses from Goldman Sachs
Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley of
obscuring from regulators their investments in metals or natural
gas.
The hearing concerns a report by the subcommittee's staff
finding banks' involvement in commodities was more widespread than
previously known and gave them an unfair advantage over other
market players. A primary concern of lawmakers is that banks that
warehouse aluminum or other metals are inflating prices by holding
on to it for longer than necessary, potentially helping the firms'
trading activities.
Write to Scott Patterson at scott.patterson@wsj.com and
Christian Berthelsen at christian.berthelsen@wsj.com
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