The Federal Reserve is considering boosting capital requirements for banks that own commodity-related assets, seeking to level the playing field between Wall Street's former investment banks and more restricted commercial banks, the Wall Street Journal reported on Wednesday.
A capital surcharge could discourage Goldman Sachs (GS.N) and Morgan Stanley (MS.N) from investing directly in commodity trading infrastructure like oil tanks and metal warehouses, even though a grandfather clause in a 1999 banking law appears to allow them to continue engaging in such activities.
No decision has been made on the issue, the Journal reported, citing people familiar with the matter.
Experts and bank officials have said for several months that the Fed would be more likely to modify some of the capital requirements related to commodity-trading regulations rather than seek to ban such activities outright.
While the Fed has come under growing public and political pressure to push back against a decade of expanding physical commodity trade, it has faced a legal bind due to the 1999 grandfather clause that gives the two former investment banks far more leeway in such activities than their peers.
The Fed is also reviewing the landmark 2003 rule that first allowed commercial banks to trade physical commodities - but not to invest directly in physical assets. However, curbing those rules without addressing the grandfathered activities risks widening the regulatory gap between the banks.
The Journal said it was unclear how a surcharge might be calculated or how costly it might be.
Many banks' commodity operations are already under pressure from increasing bank-wide capital requirements, tougher regulation and diminished volatility. JPMorgan Chase & Co. (JPM.N) is selling its physical trading desk after deciding that the unit was more regulatory trouble than it was worth.
The Fed already applies some limits to commodity holdings.
For instance, in its initial 2003 ruling that physical trade was "complimentary" to banking activities, it limited the value of commodities a bank could hold at any one time to no more than 5 percent of its consolidated Tier 1 capital.
For Goldman and Morgan, the 1999 Graham-Leach-Bliley Act says that the holding company must keep its investment to less than 5 percent of the bank's total consolidated assets. The Fed Board "may increase that percentage by such amounts and under such circumstances as the Board considers appropriate."