Goldman Sachs, the last bank on Wall Street to handle significant physical volumes of oil and gas, has pushed back against a planned crackdown on combining finance with commodities trading.
The institution warned the Federal Reserve to carefully weigh the effects on markets and companies as it sought to levy steep capital charges against a bank’s holdings of bulk materials.
In its letter to the Fed dated Tuesday, Goldman said that the proposal could further speed the exit of banks from commodities markets, warning of “less competition, less innovation, and increased costs to end users”.
The written comments were among dozens submitted to the Fed in reaction to its proposal to limit banks’ ability to buy, sell, move, store and process commodities, traditionally the domain of commercial merchants.
The Fed sought to force banks to hold more capital against these businesses to account for risks of environmental catastrophes such as explosions and spills that could shake the financial system.
The future of the rule is uncertain. Daniel Tarullo, the Fed governor who led banking reforms after the financial crisis, plans to step down in April. He will be replaced by a governor appointed by President Donald Trump, an advocate of lighter regulation.
Goldman and Morgan Stanley were pioneers in tying the business of lending and derivatives dealing with making and taking delivery of commodities such as oil or aluminium. Others including JPMorgan Chase and Barclays followed before a broad exodus partly prompted by pressure from the Fed.
Goldman has stayed put, surpassing ExxonMobil and Chevron to become the eight-largest natural gas merchant in North America, according to Natural Gas Intelligence. It also supplies crude oil to refineries, securities filings show.
Under a grandfather provision of US banking law, Goldman and Morgan Stanley are also uniquely permitted to own commodities infrastructure such as oil tankers or pipelines because they became regulated financial holding companies in 2008. Goldman has sold off infrastructure such as metal storage warehouses and coal mines, but continues to operate under the grandfather authority.
The Fed rule would impose a punitive 1,250 per cent risk weight to commodities held under this authority, requiring capital equal to their value, if they reached a certain size. Goldman called the capital requirement a “de facto prohibition”.
The Fed commodities rule also drew fire from banks’ lobbyists and their counterparts in commodities markets.
Novelis, a producer of rolled aluminium that previously raised concerns about queues at Goldman metals warehouses, nevertheless resisted the rule proposal, saying that it “goes too far to place overly burdensome restrictions” on banks and could increase costs to companies.
Supporters of the rule included Sherrod Brown, a Democratic senator from Ohio who led hearings scrutinising Wall Street banks’ involvement in physical commodities.
Trading commodities, he and two other senators wrote, exposes banks to “financial, legal and reputational risk that may be difficult to fully understand, appreciate, and ultimately value, which in turn creates safety and soundness concerns”.
