RPT-Yellen says Fed looking at possible commodities, bank rules

Thu Nov 14, 2013 1:20pm EST

By Douwe Miedema

WASHINGTON Nov 14 (Reuters) - The Federal Reserve may issue new rules for Wall Street's role in commodity markets once it winds up a review of banks' raw materials trading, the prospective new head of the U.S. central bank told lawmakers.

The Fed said in July it was reviewing a decision to allow regulated banks to trade in physical commodities, leading to banks' ownership of assets like oil storage tanks and power plants and accusations of price manipulation.

"We may be involved in additional rule-making as we complete this review," Janet Yellen told the Senate Banking Committee on Thursday at a hearing into her nomination to lead the Fed, the foremost U.S. bank regulator.

Answering lawmakers grilling her on the Fed's role during the credit crisis for much of the meeting, Yellen stuck to a policy laid out by Governor Dan Tarullo, the Fed's main spokesman on regulatory matters.

But it was the first time the Fed said new rules could come out of its review into raw materials trading by Goldman Sachs , JPMorgan and other banks, results of which are expected early next year.

Senator Sherrod Brown, an Ohio Democrat highly critical of Wall Street, will question the Fed next week at a sub-committee hearing about whether banks' commodity dealings are distorting prices in markets from electricity in California to aluminum, making soft drink cans more expensive.

Since the decision in 2003, banks such as Citigroup, Barclays and others have been allowed to trade oil, metals and other commodities. The Fed review also encompasses policies to contain the risks from that business.

Yellen also said the Fed also expects to be able to address concerns about a rule forcing banks to isolate risky derivatives trading into separate business units - the so-called push-out rule - without changing the law.

"I certainly hope that in the final rule ... we will be able to effectively address the concerns that people have so that it won't be necessary to repeal the rule," she said, adding she expected the rule to come out this year.

A total of 70 Democrats in the House of Representatives voted along with Republicans last month to adopt a bill to undo most of the provision, a victory for bank lobbyists even if the proposal stands a slim chance of becoming law.

Finally, Yellen said concerns about banks' overly-heavy reliance on short-term funding - a crucial cause of the collapse of Lehman Brothers in 2008 - could be fixed by asking them to put up higher safety buffers, or margin.

"(It) could take the form of a capital charge that's related to reliance on that kind of funding, or it could take the role of margin requirements," she said.

Tarullo announced the Fed was working on a rule to address concerns about short-term funding when it adopted the U.S. version of the global so-called Basel III rules for bank capital in July.