By Peter Schroeder - 04/17/14 12:01 PM EDT
Financial trade groups are pushing back against a growing call to bar banks from actually owning physical commodities.
Five of the nation’s biggest financial groups sent a joint letter to the Federal Reserve Wednesday, defending the controversial practice of banks owning physical commodities like oil, gas and metals. The groups argued banks’ presence in the commodities market is a boon for the economy, and should not be restricted by regulators.
SIFMA was joined on the letter by the American Bankers Association, the Financial Services Forum, the Financial Services Roundtable and the Institute of International Bankers.
The industry pushback comes as the Fed is facing increasing pressure from the left to crack down on banks that invest directly in commodities, a practice generally barred but becoming increasingly active in buying up metal warehouses, oil tankers and power plants.
The practice has come under scrutiny on Capitol Hill amid questions banks could manipulate the costs of commodities for profit, driving up the price tag for average Americans.
In July, a unit of JPMorgan agreed to pay $410 million to settle charges with the Federal Energy Regulatory Commission, which claimed the bank manipulated prices in electricity markets in California and the Midwest. The bank did not admit guilt as part of the settlement.
Bank critics want to see the Fed put in place harsh restrictions against a bank presence in commodities
On Wednesday, Sens. Sherrod Brown (D-Ohio) and Elizabeth Warren (D-Mass.) urged the Fed to ban banks from the commodities business. The two warned that financial institutions are entering into “unprecedented and unmanageable financial, legal, environmental, and reputational risks.”
Brown, who chairs a subcommittee of the Senate Banking Committee and could become the panel’s chairman in 2015, has held a number of hearings exploring the matter.
In January, the Fed announced it was looking into the issue, and invited the public to weigh in on its impact and risks. When it announced the initiative, the Fed noted that there are a number of risks banks face when owning commodities, such as natural disasters that could weigh on commodities and put bank stability at risk. The Fed wrapped up its comment period Wednesday.
Industry groups argued in their letter that letting banks invest in commodities helps smaller businesses by streamlining their access to commodities. And the risks posed in such investments are not that different from risks banks regularly engaged in as part of their normal business, they added.
They noted that no bank has thus far suffered a significant loss due to commodity holdings, and the institutions are adept at managing that risk. And by diversifying their activity by stretching into commodities, they argue banks are actually making themselves more stable.