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Fed urges lawmakers to toughen rules on Wall St and commodities

U.S. lawmakers should consider overturning a decades-old rule that allows Morgan Stanley and Goldman Sachs to extract, transport and trade physical commodities, a top Federal Reserve official said on Thursday.

Asked at a Senate Banking Committee hearing on bank regulation what rules could be strengthened, Fed Governor Daniel Tarullo said one target was the commodities exemption the two banks enjoy, which allows them to handle everything from crude oil cargoes and copper pallets to electricity lines and aluminum stockpiles.

Without naming the banks Tarullo said “it would be very much worth considering treating those two firms like the other banking companies.”

Tarullo, the Fed’s point person for bank regulation was joined by two other bank regulators on the panel, which was called by Senate Banking Committee Chairman Richard Shelby to examine the regulatory regime for regional banks.

Regional banks, such as Comerica Inc, fall in the middle of the supervisory spectrum, between the small community banks and the large Wall Street firms. Shelby is trying to combine regulatory relief for banks, together with reforms to the Fed and other regulatory bodies, into a financial reform bill to be crafted by April.

The Alabama Republican would like the $50 billion threshold that subjects banks to tougher supervision to be moved higher. Tarullo previously has said he supports the idea of raising the threshold to around $100 billion but on Thursday he said such a move should still allow the Fed to require certain measures on specific firms in appropriate circumstances.

Shelby will need Democrats on his side to push through his reform bill. Ending Goldman and Morgan Stanley’s physical commodity exemption appeared to be an area the two sides agreed on at Thursday’s hearing.

Shelby told reporters the committee would look further into the commodity exemption matter.

“The bigger the bank, often, the bigger the risk,” he said.

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Morgan Stanley and Goldman have legal protection included in a clause in the 1999 landmark Gramm-Leach-Bliley Act that “grandfathered” any commodity trading and investment activities for investment banks who later converted to Fed authority.

Spokespeople for the two banks declined to comment.

Ditching that longstanding exemption would require legislative changes by Congress and would level the playing field for U.S. banks operating in commodities markets, legal experts said.

The Fed has said previously its ability to rein in the grandfathered banks was limited.

Increased scrutiny from U.S. regulators and lawmakers has prompted Goldman to sell its base metal warehousing business and Morgan agreed to sell its oil trading division, although the sale to Russia’s Rosneft collapsed late last year.

Tarullo’s comments come as the Fed prepares to announce the results of its much-anticipated review of banks and commodities that started almost two years ago.

Regulators are expected to increase capital and insurance requirements for banks with physical commodity arms.

Tarullo pledged in November to outline proposals by the end of the first quarter.

(Reporting by Michael Flaherty; Additional reporting by David Henry in New York; Editing by Chizu Nomiyama and Andrea Ricci)

This article was from Reuters and was legally licensed through the NewsCred publisher network.