The Fed is willing to Limit Banks’ Involvement with Physical Commodities

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The Fed is willing to Limit Banks’ Involvement with Physical Commodities
The Fed is willing to Limit Banks’ Involvement with Physical Commodities

The Fed is willing to Limit Banks’ Involvement with Physical Commodities

Senator Sherrod Brown, the Ohio Democrat is leading the financial institutions and consumer protection panel, and has often raised questions over the potential for abuses when banks own and trade both physical commodities and instruments tied to them. Now, a Senate Banking subcommittee has set its second hearing on the issue for tomorrow to look after the issue.

According to the sources from the Fed, it is weighing whether to extend legal and regulatory exemptions that allow banks to participate in the commodities market. There are severe impacts of the existing system and to chop it out, the Federal Reserve is poised to take a preliminary step toward limiting banks’ involvement with physical commodities.

The issue is already on the minds of congress and it is mulling a plan to set it for once and for all. In fact, the Fed is planning to come up with ways to curb ownership and trading of commodities that may include inter alia oil, gas and aluminum by deposit-taking banks. According to congress dealing in commodities could create conflicts of interest.

The lawmakers are of the opinion that when the banks are given such power it can lead to market manipulation which is against the interest of customers and the overall economy. In fact, a Senate Banking subcommittee is already hearing the issue and expected to come up with a decision soon.

**relatedarticle**

Curious Case of Goldman Sachs Group Inc. and Morgan Stanley (MS)

Currently, the legal status is that banks cannot own non-financial businesses unless they get special exemptions. However, there have been several violations; in fact; Goldman Sachs Group Inc. and Morgan Stanley (MS) two giants in the banking sector were earlier securities firms. Now the conflict is appearing as they are now banks and cannot continue with their old business.

Earlier reports were coming that JPMorgan may exit businesses after the Fed announced its review. According to reports, it could sell or spin off holdings including warehouses and the stakes it has in power plants as well as trading in materials such as gas and coal. However, the latest update is that it wants to continue trading commodity derivatives.

The latest news coming from the government is that the Fed is soliciting comments and other input before regulators take a position on a potential rule that will determine whether banks should be involved in physical commodity trading.

To contact the reporter of this story: Jonathan Millet at john@forexminute.com