When the Federal Reserve gave JPMorgan Chase approval to trade physical commodities in 2005, it prohibited the bank from expanding into the commodity storage business to minimize its exposure “to additional risks.” Five years later, JPMorgan bought one of the world’s biggest metal warehouse companies.
While the Fed won’t discuss why its regulators permitted that purchase, the central bank announced on July 19 that it’s reviewing a 2003 decision that set the precedent for letting deposit-taking banks trade physical commodities. “The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” said Barbara Hagenbaugh, a Fed spokeswoman. “Like any regulator, the Fed doesn’t like reversing a long line of decisions,” says Saule Omarova, a law professor at the University of North Carolina at Chapel Hill. “If they get enough pressure from the outside, they might be forced to do so.”