February 14, 2017

Brown, Reed, Merkley Urge Fed to Strengthen, Finish Rules to Curb Wall Street Commodity Ownership

WASHINGTON, D.C. – Today, U.S. Sens. Sherrod Brown (D-OH), Jack Reed (D-RI), and Jeff Merkley (D-OR) urged the Federal Reserve to strengthen and complete its proposed rules to curb Wall Street banks’ ownership of physical commodities, such as oil, coal, and metals. Brown, the ranking member of the Senate Banking Committee; Reed, a senior member of the Banking panel; and Merkley outlined their concerns in a letter to Fed Chair Janet Yellen.

The Senators commended the Fed’s work on the proposed rules, and for calling on Congress to limit Wall Street’s investments in merchant banking and physical holdings. The long-awaited rules, which the Fed proposed in September, would require banks involved in physical commodity activities to boost capital to cover the risks of such investments. Banks would face tighter limits on trading in these markets, and could no longer engage in the business of running power plants. In addition, banks would be prohibited from owning and storing copper.

In their letter, the Senators said many of the changes outlined in the Fed’s rules are “welcome and overdue.” They also questioned claims from the rules’ opponents who have suggested that banks’ activities in physical commodities have never posed risks to the financial system as a whole. The Senators noted that in the run-up to the 2008 financial crisis, many regulators and policymakers ignored warnings from academics and community groups about the dangers of unfettered derivatives and subprime lending.

“[T]his argument ignores the important lesson from recent history that we should not wait for crises to metastasize before taking action to address their potential consequences,” the Senators wrote. “Failing to learn from our past shortcomings will almost certainly ensure that we repeat them, potentially with disastrous consequences… By trading commodities, [financial holding companies] expose themselves to financial, legal, and reputational risk that may be difficult to fully understand, appreciate, and ultimately value, which in turn creates safety and soundness concerns.”

The Senators outlined a series of ways for the Fed to improve the rules:

  • Expand the scope of physical commodities covered under the rules to account for additional liability concerns such as the environmental impact and human rights consequences stemming from displacement caused by mining, extraction, and other activity.
  • Revise the proposed capital rules to address the risks associated with commodity financing.
  • Narrow the scope of physical holdings that were protected by grandfathering that allow two banks to have more flexibility than most banks.
  • Expand the limits on merchant banking.
  • Require more comprehensive disclosure of banks’ activities in physical commodities, such as information about how the institutions manage and analyze risk.

The Senators also emphasized their support for the Fed’s proposals to rescind the orders allowing banks to provide energy management and tolling services, and remove copper from the list of approved precious metals.

Owning and storing physical commodities, such as aluminum in bank-owned warehouses or oil in storage tankers, provides banks with opportunities to effectively drive up the cost of everyday commodities and products, including gasoline, canned soft drinks and beer, and electricity. Brown led hearings to shine a spotlight on this issue in 2013 and 2014. After years of assurances and delays, the Fed proposed the long-awaited rules in September.

The Fed's call for Congress to bar merchant banking and curb big banks' ownership of grandfathered physical holdings were part of recommendations it proposed with other U.S. financial regulators in September. Their report was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The full text of the letter is available here.