Senate Dems urge Fed to block banking commodity investments

Senate Democrats are urging the Federal Reserve to prohibit banks from investing in physical commodities like oil, gas and metals, because of the risks it poses to the U.S. financial system.

Sens. Sherrod Brown (Ohio), chairman of a Senate banking subcommittee, and Elizabeth Warren (Mass.) wrote to the Fed on Wednesday to express their concerns about banks that engage in commodity trading. 

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The Fed is considering how to regulate these banking activities. Wednesday is the last day to comment on the agency's proposal.

"We are concerned that commercial commodities and energy activities expose (Federal Reserve)-regulated financial institutions to unprecedented and unmanageable financial, legal, environmental, and reputational risks," the senators wrote.

Since 2007, banks have dramatically increased their investments in physical commodities. In fact, the senators pointed out that six of the largest U.S. banks own more than 14,000 subsidiaries, but only 19 of those subsidiaries are actually banks.

Many banks will invest their own money in energy markets by purchasing oil pipelines, tankers, metals warehouses and electricity power plants.

The senators said this opens the banks to more than just financial risks. The banks could also be exposed to legal and environmental challenges, while at the same time ruining their reputation, they said.

For example, last summer JPMorgan was fined $410 million by the Federal Energy Regulatory Commission for manipulating power markets in California and the Midwest.

“As a general matter, (banks) should be prohibited from owning physical assets like warehouses, pipelines, and tankers,” the senators wrote. “These activities pose significant safety and soundness, legal, and reputational risks to institutions.”