.jpg)
The Securities Industry & Financial Markets Association (SIFMA), the American Bankers Association (ABA), the Financial Services Forum (FSF), Financial Services Roundtable (FSR), and the Institute of International Bankers (IIB), collectively the "Associations," yesterday evening filed a comment letter with the Board of Governors of the Federal Reserve on the Advance Notice of Proposed Rulemaking on complementary activities, merchant banking, and other activities of financial holding companies (FHCs) related to physical commodities. The letter is accompanied by a joint memorandum of law drafted by four law firms.
"Through their participation in the commodities markets, financial institutions provide significant benefits to the Main Street economy by adding competition and liquidity to the market place," said Kenneth E. Bentsen, Jr., SIFMA president and CEO. "This has real, positive impact including allowing companies more efficient access to capital to expand market reach with material outcomes including clean energy initiatives and importantly creating jobs. New restrictions on banks' involvement in commodities markets would disrupt a prudent historic practice and more importantly could harm American businesses and consumers through additional costs in the form of higher prices for everyday needs such as heating fuels, gasoline, airline tickets and other consumer products. Thus it's no accident that a wide cross-section of the commercial sector has echoed our comments that the Federal Reserve should maintain the long-standing allowance of financial institutions, including banks, in the commodities."
"Allowing financial holding companies to continue to conduct physical commodities activities, all while applying the right safeguards, is a critically important step toward ensuring the global competitiveness and openness of our American markets," said Rob Nichols, President and CEO of the Financial Services Forum. "And that is why bank customers across various industries have voiced their strong support for allowing banks to continue to operate in this space."
"Financial institutions have a long track record of providing needed capital and services to the commodity industry and investors under existing regulatory safeguards," said Tim Pawlenty, FSR CEO "Additional regulations which unduly hinder that role could stifle competition, increase costs, and reduce badly needed job growth in this still fragile economy."
The Associations lay out six principal comments and a set of recommendations to reduce potential risks of environmentally sensitive commodities handling activities and enhance public disclosure about physical commodities activities.
The letter discusses the long-standing relationship between banking and the physical commodities markets. It emphasizes the public benefits of allowing banks to continue to participate in commodities markets, which include greater transparency, reliability of supply, price stability for consumers and more efficient access to credit.
The Associations stress the benefits to small and mid-sized businesses, as bank involvement helps them make more efficient use of their capital, allowing them to expand their businesses, innovate, and create new jobs. Banks can help small and mid-sized businesses expand their scale and geographic reach, helping these firms compete with the largest players that traditionally dominate key industries, such as oil, gas, and metal. This is particularly evident in the energy sector.
The Associations also address concerns with risks. They highlight that the risks associated with buying, selling, maintaining inventories and otherwise providing commodities intermediation services to clients are not fundamentally different from or greater than the risks associated with traditional banking and other financial activities. While the "tail risks" of operating or investing in transportation, storage or other facilities for handling environmentally sensitive commodities, such as oil, natural gas and nuclear power, can be higher, FHCs carefully evaluate environmental risks from commodities operations in the same fashion as they do other business risks before proceeding deciding to enter in to any transactions.
Furthermore, the Associations stress that FHCs have the ability to mitigate these risks by complying with certain well-established safeguards, subject to supervision by the Federal Reserve. History shows that banks have a record of managing the risks associated with the commodity business and that no bank has previously suffered any material loss because of a drop in value of commodities or an environmental incident. This is true both when banks act as intermediaries for their clients in commodities businesses and when they make merchant banking investments in commodity-related businesses.
Additionally, the letter addresses concerns regarding the impact of their activities on systemic risk or another financial crisis. In fact, by offering a diversified source of assets and revenues, this business may have offset losses on other assets, thereby helping to moderate the extent of the crisis.
Finally, the Associations reiterate that while FHC's commodities intermediation activities have generally expanded over time, they occur in conjunction with extensive environmental rules and regulations and enhanced business attention to environmental concerns, designed to respond to emerging threats and to ensure the safety of these activities.
The text of the letter, joint memorandum, and study can be found here.
