A group of large financial institutions don't have anywhere near the capital they need to offset potential catastrophic risk associated with their physical commodities businesses, according to a 403-page congressional report released Wednesday. At the same time as the operations are giving the institutions an unfair trading advantage that isn't being fully disclosed to their primary regulator, the report adds.
At issue is a two-year study and report produced by retiring Sen. Carl Levin, D-Mich. and his staff of the Permanent Subcommittee on Investigations that was released in advance of two days of hearings Thursday and Friday, with top bank officials and regulators set to testify.
The report raises a number of different concerns and included examples of how major banks have sought to corner the market for certain commodities so they can profit from trading of derivatives referencing those underlying commodities. In addition, the report suggests that a group of four big banks don't have sufficient capital buffers to cover potential losses associated with an "extreme loss scenario" involving their physical commodity businesses, which include large stakes in oil tankers, pipelines and metals warehouses. It cites a 2012 confidential Federal Reserve staff analysis comparing losses experienced with the Exxon Valedez oil spill and British Petroleum's Deepwater Horizon oil spill event suggesting that each of the four big institutions are underinsured and they have a shortfall in the capital buffer department of between $1 billion and $15 billion to offset these kinds of potential losses.
The two year investigation has already put pressure on the Fed to have the primary big banks in the business -- Goldman Sachs & Co. (GS) , Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM) – wind down or divest what remains of their physical commodity businesses. And while some of the institutions have started to wind down these businesses others are seeking to get into commodities.