(Bloomberg) — Senator Jeff Merkley called on the Federal Reserve to prohibit U.S. bank-holding companies from engaging in physical commodities.
Merkley, an Oregon Democrat, sent a letter to the Federal Reserve urging the regulator to prohibit banks from owning physical commodities. In cases where the Fed permits banks to engage in such activity, it should at least set guidelines for compensation and internal use of trading and customer information to eliminate conflicts of interest.
“I am concerned that physical commodity ownership and trading by bank-holding companies exposes the entire financial system and economy to significant risk,” Merkley said in a June 8 letter to the Federal Reserve. “Commodity activities pose a particular risk for a bank holding company because of the unique vulnerabilities of a bank.”
The Fed is undergoing a review of banks’ physical commodities activities following congressional hearings last year by Senator Sherrod Brown, a Democrat from Ohio. Senator Carl Levin, a Michigan Democrat, continues to investigate possible conflicts of interest and manipulation in those markets. Levin leads the Permanent Subcommittee on Investigations.
In April the Fed concluded a comment period on the risks posed by bank ownership and trading of commodities such as oil, gas and aluminum, and the possible benefits of imposing additional capital requirements on such activities. The Fed has yet to announce if it would follow up with rulemaking on the issue.
JPMorgan Chase & Co., Morgan Stanley and Bank of America Corp. have announced plans to sell portions of their commodities business. The Fed’s action could increase pressure on Goldman Sachs Group Inc. to exit the physical commodities business.
Goldman Sachs announced in May that it has begun the process to sell Metro International Trade Services LLC, the metals warehouse business purchased by the bank in 2010. Goldman had previously defended the need for banks’ involvement in the physical commodities business.