Banks pulling out of commodity trading because of rules on proprietary investing and capital requirements are pushing raw-material trade into less regulated and more opaque territory, investor Eric Schreiber said.
Regulations such as Basel III and the Dodd-Frank Act have a “significant impact” on banks, pushing commodity business to trading houses, according to Schreiber, the former head of commodities at Swiss wealth manager Union Bancaire Privee.
“One of the unforeseen consequences is that it’s pushing part of the business into a more opaque, unregulated area, that is, the trading houses,” Schreiber said before a presentation today at a United Nations conference in Geneva.
Banks active in commodities face “acute pressure” to exit the business due in part to compliance costs, political pressure to divest and increased capital requirements, according to Schreiber’s presentation. Aggregate annual revenue from the top 10 bank commodity operations fell to $4.5 billion last year from a peak of $14 billion in 2008, his data show.
Dodd-Frank, approved by U.S. Congress in 2010, restricts lenders from using their own capital to make bets on stocks, bonds and commodities. The Volcker Rule was included in the act to restrict risky trading at banks that operate with U.S. guarantees. Basel III refers to banking regulation that set capital requirements for banks to reduce risks.
Energy is probably the class most affected because it’s the most financialized commodity, while industrial metals will also be affected by banks pulling back, Schreiber said. Agriculture is probably the least impacted “as it was never as financialized as other commodities,” he said.
As banks exit, major oil companies and trading houses are replacing them, according to Schreiber. The number of commodity trading companies in Geneva doubled between 2006 and 2011 to 400 from 200, according to his presentation.
Non-bank entities are subject to lower capital and reporting requirements and are not subject to restrictions on employee compensation, Schreiber wrote in his presentation. Many trading companies are privately owned and do not disclose financial results.