A decade ago, Timothy Lane, deputy governor of the Bank of Canada, posed an intriguing question: Are commodity traders too big to fail? It was just after the 2008-09 global financial crisis, when policy makers were scanning the global economy looking for the next potential nightmare.
Lane was among a small group of officials who worried it was hiding in plain sight — that the likes of Glencore Plc, Cargill Inc., Vitol Group and Trafigura Group, the secretive giants that underpinned global trade in natural resources, represented a systemic financial risk.
“Could the failure of one of the large trading houses cause serious disruption in the commodities markets?," he asked in a speech in September 2012, arguing their size raised “the possibility” they were “becoming systemically important.”
The events of the last few days, from the London Metal Exchange shutting down nickel trading to commodity titans rushing to raise credit lines, make Lane’s hypothetical a crucial question right now. I have long argued that commodity traders don’t matter to the global economy in the same way that Lehman Brothers did: the collapse of one won’t trigger a global recession. And yet, they remain too big to be ignored — and a possible source of big trouble if left unattended.
In a letter to governments dated March 8, the European Federation of Energy Traders, a trade body that groups some of the largest commodity traders and utilities on the continent, pleaded for help. They warned that the industry was facing "intolerable cash-liquidity pressure" and may need "time-limited emergency liquidity support" to weather the crisis.