Goldman Sachs (GS) dropped the most in almost two weeks after the Federal Reserve issued a proposal that would install new capital requirements and limits on big bank activities in the physical commodities markets.

Specifically, the agency would require firms to hold additional capital in connection with their activities involving commodities and cap trading in physical commodities.

The rule would prohibit banks from engaging in physical commodity activities involving power plants and remove copper from the list of metals that they're permitted to own and store. It would also establish a new public reporting requirement on their physical commodity holdings, a key provision because existing standards don't require a lot of details.

Lawmakers on Capitol Hill have put pressure on the central bank in recent years to raise capital requirements and install other restrictions on big bank commodity units, arguing that the institutions don't have anywhere near the financial cushion needed to offset potential catastrophic risk associated with those businesses.

The proposal, if adopted, could force some large banks to divest units. The Gramm-Leach-Bliley Act, approved in 1999, allowed some banks to buy into heavy industry, including pipelines, oil tankers and power plants.

The Fed's proposal follows a Senate investigations committee finding in 2014 that an aluminum warehousing business Goldman Sachs owned, Metro International Trade Services, engaged in hundreds of "merry-go-round" transactions where aluminum was transported hundreds of times from one Goldman Sachs-owned warehouse to another, sometimes a few miles away.

The trips forced metal owners to wait up to two years to get their metal out of storage rather than what was the 40-day average delay in 2010. Critics argued the transfers had the correlated effect of raising the price of aluminum for U.S. buyers, such as automakers, beer-can manufacturers and consumers, at the same time that it gave the bank's commodity and derivatives traders an advantage if they knew in advance that logistical costs were about to rise.

The Fed's proposal, if adopted, would likely hit Goldman Sachs the hardest among large banks because of its extensive commodities business. Under pressure from the congressional report, Goldman Sachs sold Metro International to Swiss buyout shop Reuben Brothers in December 2014.

The proposal shouldn't be a surprise to the industry, with Fed Governor Daniel Tarullo suggesting in speeches in recent months that the central bank was leaning towards hiking capital requirements for banks engaged in physical commodity businesses.

The Fed earlier this month issued a 109-page report, required by the Dodd-Frank Act, recommending that Congress prohibit large financial institutions from engaging in merchant banking activities, a move that was applauded by some critics of too-big-to-fail banks but opposed by the industry.

A group of banking lobbyists, including the American Bankers Association, issued a statement saying that the regulators' recommendations are "unfortunate and ill-considered."

The group added that for the past 15 years, "bank holding companies have successfully used the merchant banking authority granted to them by law to finance start-ups and growing companies." Banks have done so "without any threat whatsoever to the safety and soundness of their affiliated banks or to the financial system at large," the association argued.

The Fed stopped accepting comments in April 2014 on the structure of a potential rule on physical commodity trading.

Both the Fed and Tarullo, who leads the central bank's regulatory operations, have urged Congress to repeal an advantage that Morgan Stanley (MS) and Goldman Sachs receive from a controversial provision in the 1999 Gramm-Leach-Bliley Act that lets them keep a physical commodity business if they owned it before September 1997.

The provision has given a grandfathered right to the two firms to engage in far broader range of commodities-related activities than other bank holding companies.

The proposal disclosed Friday wouldn't prohibit banks such as Goldman and Morgan Stanley from engaging in physical commodity business, it would only set a tough capital charge for doing so.

Goldman dropped 1.7% to $165.13 in New York trading on Friday, while Morgan Stanley fell 1% to $31.91. The wider KBW Bank Index was little changed.

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