July 24 (Bloomberg) -- Banks probably will face restrictions on owning companies that deal in physical commodities after the Federal Reserve reviews the permissions it has granted, said Brad Hintz, a bank analyst at Sanford C. Bernstein & Co.
U.S. lenders will see “probably some limitation on the ability to own warehouses,” Hintz said in a Bloomberg Radio interview today with Tom Keene and Michael McKee. “It becomes a regulatory issue. Do you really want a financial institution to own a refinery?”
The Fed said last week it is reviewing a decade-old decision to remove barriers between finance and commerce by letting banks deal in physical assets like metal and oil. U.S. Senator Sherrod Brown, an Ohio Democrat, said in an interview yesterday that he may call Fed officials to testify in September to explain why the agency lets banks trade raw materials and control supplies.
“The argument they make is, ‘I should be in the physical commodities business because if I’m lending against something, I have to be able to liquidate it,’” Hintz said. “There’s merit in that. It’s really then the question of how much further you go down that path.”
Private-equity firms could buy companies that banks are forced to divest, Hintz said. The 10 largest Wall Street banks generated about $1 billion last year from dealings in physical materials, according to data from analytics company Coalition Ltd.
JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and Barclays Plc have the biggest commodities operations among large banks, Hintz said.
“Historically these guys were energy traders with a little gold, and you’re now seeing them move into metals,” Hintz said. “The trading approach seems to be very similar, which is looking for bottlenecks in the market and trading around the bottlenecks.”
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