Thursday, July 7, 2016

Physical Commodities: Fed Governor Tarullo Talks Capital Hike for Morgan Stanley, Goldman (GS; MS)

From The Street, July 6:
The central bank chief said an advantage the two institutions receive from a 1999 law is 'anomalous' and it would be better to 'phase that out.

Federal Reserve Board Governor Daniel Tarullo on Wednesday targeted Morgan Stanley (MS) and Goldman Sachs (GS) with comments suggesting that big banks that own physical commodity businesses will be hit with more capital restrictions once a rule governing their business is completed.
"We do have capacity to change capital requirements with respect to certain activities related to commodities and that is the direction which we will be headed," Tarullo said at a Wall Street Journal event at the Newseum in Washington.

Tarullo (pictured) specifically suggested that Goldman Sachs and Morgan Stanley could be hit with particularly tougher restrictions over their physical commodity businesses.

Those measures could force the two big banks to divest commodity businesses. Lawmakers on Capitol Hill have put pressure on the central bank to hike capital and install other restrictions on big bank commodity units, arguing that the institutions don't have anywhere near the capital they need to offset potential catastrophic risk associated with those businesses. In addition, Democratic senators have raised concern that the operations at some of the largest institutions give them an unfair trading advantage that isn't fully disclosed.

Tarullo suggested that an advantage that Morgan Stanley and Goldman Sachs receive because of a controversial provision in the 1999 Gramm-Leach-Bliley Act could be phased out. The provision permits Goldman Sachs and Morgan Stanley to continue to own a physical commodity business if they owned it before September 1997. A move by the Fed to keep the two big banks out of that business would require that they divest physical commodity assets.

The status of those two institutions changed in September 2008, when the Fed, as part of an effort to limit the fallout from the expanding liquidity crisis, allowed them to register as bank holding companies in order to take advantage of the low-cost funding available at the Fed's discount window operations.

"The Gramm-Leach-Bliley Act in 1999 had an interestingly drawn provision which prospectively exempted institutions that were currently engaging in all forms of commodity activities that might at some point in the future become bank holding companies and thereby has given a grandfathered right to a couple of firms to engage in far broader range of commodities-related activities than other bank holding companies," Tarullo said. "I do think that is something which is anomalous in a regulatory system and I think it would be better to phase that out....MORE