Wells Fargo wants to finance metal trade in test of new rule

WASHINGTON (Reuters) - Wells Fargo & Co WFC.N has asked its main regulator if it may buy platinum and lease it to a client in a test of a new rule meant to limit banks' exposure to volatile commodity markets, people familiar with the matter told Reuters.

FILE PHOTO - The sign outside the Wells Fargo & Co. bank in downtown Denver April 13, 2016. REUTERS/Rick Wilking/File Photo

The Office of the Comptroller of the Currency (OCC) introduced the rule early this year to ensure that banks entrusted with customer deposits do not bet on price swings of metals.

Wells Fargo would do the deal on behalf of an energy company and charge a fee for the service, said three people familiar with the request who were not authorized to discuss it publicly.

A green light could help Wells Fargo grow a business catering to industrial clients even as the bank grapples with several scandals in its retail division.

Like other large lenders, the San Francisco-based company may already perform metal trades through a non-bank affiliate that does not rely on federally-backed deposits. The U.S. Federal Reserve oversees those entities.

Wells Fargo said such business already exists. “Metals leasing is a common and effective financing approach for many companies that use precious metals in their products,” said a company spokesman.

However, Wells Fargo has asked whether some of that business could reside in the banking division, sources said. Doing so could be less costly because it is able to tap cheaper financing than the non-bank unit, and therefore may allow Wells to offer more competitive terms for clients.

Wells Fargo declined to comment about its request to the OCC.

The OCC rule strictly prohibits banks from speculating in metals markets but does allow banks to accept metals as collateral for ordinary loans. The OCC has said it would review loans on a case-by-case basis.

The regulator left room for exceptions and its guidance in this case could be an indication of how it plans to enforce the rule under its new chief, Joseph Otting.

The OCC is now reviewing Wells Fargo’s request, the sources said.

Wells is a small player in physical commodities trading, and in precious metals in particular banks such as HSBC Holdings PLC HSBA.L, UBS Group AG UBSG.S, JPMorgan Chase & Co JPM.N and Bank of Nova Scotia BNS.TO have much greater presence.

However, Wells is trying to grow its services to corporations and financial institutions - known as 'wholesale banking' - to compete with rivals, such as JPMorgan, Citigroup Inc C.N and Bank of America Corp BAC.N.

Wells earned $6.5 billion from the wholesale banking business in the first three quarters of the year, up 8.4 percent from the same period in 2016. It represented 41 percent of its total net income.

As Wells Fargo awaits the regulator’s response, it is also facing more scrutiny related to the long-running sales scandal, primarily in its consumer bank.

The bank reached a $190 million settlement with the OCC and other agencies in September 2016 after revelations that thousands of employees have opened phony accounts in customers’ names without their permission. As many 3.5 million accounts may have been affected.

Since then, Wells has found troubles in other businesses including auto lending and mortgages, which the OCC and the Consumer Financial Protection Bureau are examining for more possible penalties.

The transaction Wells inquired about involves buying platinum from a supplier and leasing it to a refiner that can use it to turn crude oil into high quality fuel, people familiar with the deal said. At the end of a refining process, the platinum is recovered and can be returned.

The bank could try to offset its exposure to platinum price swings while the metal is on its books through financial contracts that act as insurance, the sources said. There is no guarantee those hedges would be effective.

Elise Bean, a former Congressional investigator, said banks face enough risk lending to the commodity industry without adding actual commodities to their balance sheets.

“There is no reason for a bank to take on commodity price risk when they do this stuff,” said Bean, who was chief counsel to the Senate Permanent Subcommittee on Investigations.

Reporting by Patrick Rucker in Washington; Additional reporting by Dan Freed in New York and Jan Harvey in London.; Editing by Lauren Tara LaCapra and Tomasz Janowski