A Senate subcommittee headed by Sen. Sherrod Brown (D-Ohio) held a hearing on Tuesday to examine whether commercial banks and bank holding companies should control the commodities market.
While BHCs have typically been prohibited from engaging in commercial activities under the Bank Holding Company Act, the institutions have used a number of loopholes in recent years to expand their operations into the physical commodities and energy markets.
Investment banks like JPMorgan Chase, Morgan Stanley and Goldman Sachs have made billions in profits in the commodities market. Regulators have, however, accused several institutions of rigging prices, The New York Times reports.
Special exemptions granted by the Federal Reserve and eased regulations approved by Congress have allowed banks to buy infrastructure used to store commodities, including coffee, wheat, cotton, oil and aluminum, and deliver them to consumers. Some analysts maintain that by controlling supply and storage, banks gain added insight into the market.
“Information is worth money in the trading world and in commodities, the only way you get it is by being in the physical market,” Jason Schenker, the president and chief economist at Prestige Economics in Texas, said, according to The New York Times. “So financial institutions that engage in commodities trading have a huge advantage because their ownership of physical assets gives them insight in physical flows of commodities.”
Aluminum purchasers represented by MillerCoors, the second largest beer brewer in the U.S., told the committee at the hearing that banks’ control of warehouses increased costs by as much as $3 billion last year through supply distortion, Chicago Tribune reports.
Brown said at the conclusion of the hearing that the Senate Banking Committee will request testimony from financial institutions and the Federal Reserve at another hearing in September.