Merkley Calls on Federal Reserve to Close Loophole that Allows Big Banks to Own and Manipulate Commodities

Merkley Calls on Federal Reserve to Close Loophole that Allows Big Banks to Own and Manipulate Commodities

Loophole has raised prices for consumers and threatens financial stability

WASHINGTON – Oregon's Senator Jeff Merkley is calling on the Federal Reserve to close a loophole that allows big banks to own and control physical commodities—such as oil, aluminum, and electricity—raising prices for consumers and threatening the stability of the financial system.

The Federal Reserve has been taking public comments on how to regulate banks' ownership of commodities, after numerous news reports in recent years indicated that consumers may be paying the price as banks bought up such commodities as tankers full of oil and aluminum warehouses, and banks faced federal charges of manipulating electricity markets at the expense of consumers.

Since most large banks trade on the price of the commodities, there is a strong potential for conflict of interest when they also control supply and demand. In effect, banks could bet on the price of a commodity going up, while at the same time limiting supply to raise the price.

"I appreciate the opportunity to comment on whether our largest, most complex bank holding companies [...] ought to be able to own, control, transport, or trade in physical commodities like oil, electricity, and metals.  The answer, I believe, is simply 'no,'" Merkley wrote in his comment letter.

Merkley noted that banks' ownership of physical commodities could have outsized risks for the financial system, since bank ownership of a commodity that experienced a major disaster—such as the nuclear plant at Fukushima or the BP Gulf Coast oil well in 2010—could jeopardize that bank's place in the financial system.

Merkley also drew attention to the real costs that manipulation of these markets can have for consumers, noting:

"[I]n recent years, we have learned that:

• Banks, hedge funds, and financial investors, in part due to deeply flawed exchange rules, have driven up the cost of aluminum, costing brewers and beer drinkers a combined $3 billion.

• Speculation in the oil market by banks and financial investors has been responsible for as much as $14 for every tank of gas purchased by American drivers.

• Banks have manipulated electricity markets, costing ratepayers millions of dollars in higher utility bills.

• The copper market is at risk of being dominated by a bank-sponsored investment fund.

• Even the price of bread and rice – staple foods for American families and hungry children around the world – is being driven up by financial speculation in grain commodities."

Merkley has long been a champion for a financial system that asks large banks to serve the needs of consumers and small businesses, not the other way around. Last summer, he drew attention to this issue at an event at Hopworks Brewery in Portland, highlighting the cost of big banks' involvement in the aluminum market for small brewers and consumers.

A pdf of the signed comment letter is attached.