Members of the powerful U.S. Senate banking committee are set to grill financial regulators Wednesday on their plans to address the risks of Wall Street banks' involvement in physical commodities markets, fueling pressure for a landmark crackdown.
A day ahead of the hearing, the Federal Reserve, for the first time, laid out its heightened concerns that leasing oil tankers or owning power plants could endanger the banking system, and may pose serious conflicts of interest for banks.
In a preliminary notice seeking public comment on possible new curbs, the Fed cited real-world risks including the BP Gulf oil spill and last year's Quebec oil train disaster as examples of the multibillion-dollar catastrophes that banks face by being involved in the risky, messy world of commodities.
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The notice also suggested possible remedies, including limits on assets and revenues as well as curbs on trade of some types of commodities, and posed questions to draw public input.
The hearing will offer senators a chance to further probe the Fed's thinking, pressing Michael Gibson, the Fed's director of bank supervision and regulation, on why the central bank is not moving immediately to impose new rules.
"Each day that we wait to rein in these activities means that end users and consumers will pay higher commodity and energy prices, and taxpayers will continue to be exposed to excessive risks at Too Big to Fail banks," Senator Sherrod Brown (D.-Ohio), who will lead the hearing, said on Tuesday.
The session follows months of growing public and political pressure to check banks' decade-long expansion into the commodities supply chain. In the first such hearing last summer, metals users complained that Goldman Sachs and others who own metal warehouses had contributed to higher prices.
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Some saw the Fed's so-called "advance notice of proposed rulemaking"—an optional initial step in a potentially years-long process of writing new rules—as a strategic political ploy to deflect complaints over inaction. It will accept public feedback for 60 days.
But others saw signs of a potentially major crackdown ahead, as the Fed questioned the initial rationale for letting banks trade and invest in raw materials, and said that even arm's length "merchant" investment deals may not be safe enough.