Tarullo Says Regulators Looking at Banks' Commodities Activities

WASHINGTON--Bank regulators are expanding their examination of bank activities in commodities markets, a senior Federal Reserve official plans to tell Congress Friday.

Fed governor Daniel Tarullo, who will testify before the Senate Permanent Subcommittee on Investigations, will provide details of the Fed's review of the activities of banks in trading and holding commodities. The Fed is weighing a proposal that could impose restrictions on banks' activities in physical-commodity markets such as aluminum, copper and oils.

The Fed has become concerned that banks' commodities ownership has expanded beyond what regulators originally envisioned and could pose risks to the firms and the broader financial system.

One concern is that banks are holding commodities with the intent of moving prices in ways that benefit the firms' trading positions. Mr. Tarullo said the Fed is planning to weigh whether it needs to apply added restrictions "to ensure that the investments are truly passive."

The Fed is also exploring other measures, such as additional capital requirements, risk-management requirements and expanded data-collection and reporting requirements on physical commodities, Mr. Tarullo plans to say.

The comments come a day after executives at three of Wall Street's biggest banks were grilled at a Senate hearing examining whether their commodities business wielded unfair market power or posed risks to the financial system. Sen. Carl Levin (D., Mich.), chairman of the subcommittee, accused witnesses from Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley of obscuring from regulators their investments in metals or natural gas.

The hearing concerns a report by the subcommittee's staff finding banks' involvement in commodities was more widespread than previously known and gave them an unfair advantage over other market players. A primary concern of lawmakers is that banks that warehouse aluminum or other metals are inflating prices by holding on to it for longer than necessary, potentially helping the firms' trading activities.

Write to Scott Patterson at [e-mail] and Christian Berthelsen at [e-mail]

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