On Friday, the Federal Reserve finally responded to years of calls to re-examine the role of big banks in commodity markets. Numerous observers, ranging from Senate investigators to regulators, have found evidence that banks have manipulated these crucial markets. Sherrod Brown, the Ranking Member of the Senate Banking Committee, has been a leader in the effort to control bank commodity activities, holding multiple hearings on the issue and urging the Federal Reserve to implement rules limiting bank commodities activities. Americans for Financial Reform has also called on the Fed to take strong action to establish firewalls between banking and commodity markets.
The Federal Reserve has now advanced a real proposal to limit commodities involvement by banks. The proposal substantially increases capital charges for commodities holdings by banks, meaning that banks will have a significant economic incentive to exit these markets. It also improves disclosures and bans banks from a number of specific commodity markets activities that permit control of commodity supplies, including directing the specific activities of storage and transportation facilities, and being involved in energy management and tolling. All of these activities have been linked to commodity market manipulation.
Along with the Federal Reserve’s recent report on the activities and investments of supervised banks, which recommended that Congress place additional limits on bank activities in commercial markets, this proposal indicates that the Fed is finally taking more seriously the need to restructure banks to better comply with the separation between banking and commerce that is laid out in the Bank Holding Company Act and a long tradition of American banking law. While these measures are still too limited to reverse the enormous expansion of universal banks that has taken place over the last few decades, they are a good step.