Report for banks finds they pose more risk than commodity traders

Tue May 14, 2013 8:14am EDT

* Commodity traders not seen as "too big to fail"

* Watchdog raises scrutiny of lightly regulated sector

* Bank lobby group commissioned study on trading houses

By Emma Farge

GENEVA, May 14 (Reuters) - A study commissioned by a global banking lobby group has found that banks pose a greater systemic risk than their commodity trading house competitors do and the report has not been made public, its author said.

Craig Pirrong, a University of Houston academic confirmed he was the author of the study commissioned by the Global Financial Markets Association (GFMA).

He said the GFMA, chaired by bank JP Morgan's head of global commodities Blythe Masters, had hoped to use the study to influence the Financial Stability Board (FSB), a global watchdog that has been examining regulation of commodity trading.

"I call them like I see them. GFMA didn't like that. I wouldn't change the call, so they sat on the report," Pirrong wrote in his blog "Streetwise Professor" on Monday.

In another posting Pirrong argued that commodity traders, unlike large banks, are not regarded as "too big to fail".

GFMA, a body linking three major financial trade associations in Europe, Asia and North America that lobbies on regulatory issues, denied that the report had remained in draft form because its findings did not suit the group.

"GFMA often commissions research which is shared with the regulatory community and not published more widely," it said in an emailed statement.

The FSB is studying the role of commodity traders as part of two separate reviews of the shadow banking system and systemically important financial institutions.

This work could result in new restrictions for the relatively lightly regulated commodity trading sector, which competes with banks in areas such as commodities lending.

The report for the GFMA could, however, justify lighter regulations for commodity traders than for banks and, in the eyes of banks, entrench an unfair advantage.

The Financial Times on Monday quoted the study commissioned by the GFMA as saying that large trading companies, such as Glencore or Vitol, "pose less systemic risks" than large banks.

The newspaper quoted people familiar with the situation as saying the report remained in draft form after its conclusions did not meet the group's expectations.

The GFMA declined to provide Reuters with a copy of the report but said it had been made available to regulators.

"In this case, in July 2012, we shared a draft of the report with key policymakers and regulators from all over the world, including the Financial Stability Board (FSB), the Securities and Exchange Commission in the US and the UK's Financial Services Authority."

The regulatory burden on banks is growing.

They face more stringent capital requirements under the new Basel III restrictions aimed at reducing systemic risk after the 2008 crisis, during which some banks were bailed out having been judged "too big to fail" because their collapse would endanger the financial system.

In one of his blogs, Pirrong wrote: "I know...that major banks involved in commodity markets are chafing under the restrictions imposed on them, and resent the fact that commodity firms that are their competitors in certain activities are not subject to the same restrictions."

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