FRB Excoriated by Senate Democrats on Physical-Commodity Activities, Late-Breaking ANPR
The day after the FRB released an ANPR on the role of banks in physical commodities, Sen. Brown (D-OH) convened the third hearing on this topic in his Financial Institutions and Consumer Protection Subcommittee of Senate Banking. As anticipated, Sen. Brown castigated banks for this business, arguing that it not only raises prudential and financial-stability risk, but also creates irresistible incentives for market manipulation that increase commodity-user and consumer cost. In his testimony, the head of supervision at the FRB, Michael Gibson, focused on the “unique tail risk” of these activities and potential contagion risk, although he made clear that the ANPR is the forum being used to assess these concerns. Under fire from subcommittee Democrats, Mr. Gibson repeatedly said the FRB appropriately addresses the safety and soundness of physical-commodity operations, but he did concede that little if any attention is paid to possible market concentration, conflicts of interest, the price impact of large-bank cross-holdings and trading incentives, and financial stability. Mr. Gibson also took heavy fire on the extent to which FHCs, including grandfathered ones, engage in physical commodity transport, warehousing, and the like and the long time it has taken the Board to consider their prudential, policy, financial-stability, and market impact. One key focus during the hearing is the different powers held by most FHCs and grandfathered ones, with Mr. Gibson saying that, while this is a question on the ANPR, it is a matter of law. No Republicans attended the hearing, which is analyzed in depth in this report, but Sen. Brown did lay out possible legislation not only regarding overall FHC regulation, but also ways better to align physical-commodity authority across different types of firms and sharply limit it at FHCs going forward.
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