By Douwe Miedema
WASHINGTON Nov 14 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