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The Federal Reserve is considering reversing decade-old rule allowing banks to ship oil and storing metal. How it could influence commodity trading?
If the Federal Reserve reverses the rule allowing banks ship oil and store metal, it would be the biggest exclusion of banks from a market and it would put banks commodity-trading business in jeopardy.
Most likely, commodity prices would stabilized or even go lower, because of the heavy impact it will have on banks.
And for the banks, it would hurt profitability of the banks. The 10 largest Wall Street banks generated about $6 billion in revenues from commodities in 2012, including dealings in physical materials as well as related financial products. The banks impacted the most would be JPMorgan, Morgan Stanley and Goldman Sachs. Goldman Sachs held $7.7 billion of commodities as of March 31, 2013 and Morgan Stanley held $6.7 billion.
Next, it would bring tougher capital rules for banks, create lower trading volatility, lower trading volume and it might force banks to downsize employees in commodities. Morgan Stanley is already cutting 10% of its workforce in commodities. Commodities revenue at the 10 largest firms was already down 24% in 2012 and down 54% in the first quarter in 2013 from a year earlier.
Finally, banks would be forced to sell their warehouses networks and it would hurt employment and profitability of the cities where these warehouses located. One of these locations is already financially bankrupt, city of Detroit.
Now, letting banks store and ship physical commodities is a decade-old rule that came into play when Congress repealed the Glass-Steagall Act in 1999. The reasoning for the rule was that certain commodity activities are complementary to financial activities and permissible for bank holding companies. Consequently, right now banks involved in warehousing, storing, managing tankers, marketing, providing research, selling, trading commodities and similar services.
The Federal Reserve was silent on this issue for a long time. But after JPMorgan faced fines for potential manipulation of U.S. energy prices making at least $73 million in improper payments, Federal Reserve faced criticism and pressure from Congress.
On that note, the reasons for reversal of the rule are conflict of interests, undue concentration of resources, decreased or unfair competition, unsound banking practices, and manipulation of energy prices when banks control both supply of commodities and financial products. Also, Fed argues that it makes financial system less stable and more difficult to supervise for regulators.
If the Federal Reserve to prohibit banks to ship oil and storing metal, how it could influence commodity trading? What do you think?