UPDATE 1-Fed to issue rules on banks' role in commodities in early 2015
(Adds quotes from Tarullo, details of hearing, Senate report)
By Michael Flaherty
WASHINGTON Nov 21 (Reuters) - The Federal Reserve will issue in the first quarter of next year a formal notice of rules on its review of financial holding companies and their activities in the physical commodities markets, a top Fed official said on Friday.
"We are conducting a careful and thorough assessment of the costs and benefits of financial holding company engagement in these activities," Fed Governor Daniel Tarullo said in prepared remarks ahead of a Senate subcommittee hearing on the issue of banks' involvement with physical commodities.
A two-year Senate investigation into Wall Street's physical commodities business alleged that U.S. banks had manipulated prices and gained unfair trading advantages at the expense of consumers.
Goldman Sachs Group Inc, Morgan Stanley and J.P. Morgan built huge inventories of aluminum, oil, jet fuel and other commodities and failed to properly insulate themselves from potential losses stemming from the stockpiles, according to a report by the Senate's Permanent Subcommittee on Investigations, which was released on Wednesday.
The Fed has been reviewing how it regulates large banks with physical commodity holdings, and it invited public comments earlier this year.
The subcommittee report points the finger at the Fed, saying the central bank has taken insufficient steps to address the risks taken by financial holding companies gathering physical commodities. The Fed in some cases was unaware of the growing risk, the report said.
Tarullo said the central bank has been reviewing a range of options, including increasing capital and insurance requirements for banks with physical commodity arms, limiting the size of the operations, and prohibiting certain commodities at the banks. Continuación...