The Zacks Analyst Blog Highlights: JPMorgan Chase, Morgan Stanley, Goldman Sachs Group and Bank of America
CHICAGO, Nov. 25, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the JPMorgan Chase & Co. (NYSE:JPM-Free Report), Morgan Stanley (NYSE:MS-Free Report), Goldman Sachs Group, Inc. (NYSE:GS-Free Report) and Bank of America Corp. (NYSE:BAC-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
Here are highlights from Monday's Analyst Blog:
Banks' Commodity Business: Tougher Rules in the Cards?
Following the disclosure by the Senate Permanent Subcommittee on Investigations that banks are gradually becoming owners of physical commodities, thus putting the financial stability of the U.S. economy at risk, the Federal Reserve Governor, Daniel K. Tarullo testified before the Senate Committee. In his speech to the committee, Tarullo stated that the Fed intends to issue new tougher rules for governing the banks' commodity businesses.
Last week, the Senate Committee disclosed the findings of its 2-year long probe on the banks physical commodity businesses. The Senate report specifically mentioned JPMorgan Chase & Co. (NYSE:JPM-Free Report), Morgan Stanley (NYSE:MS-Free Report) and The Goldman Sachs Group, Inc. (NYSE:GS-Free Report) as the companies that had amassed huge stakes in commodity market. (Read more: Senate Probe: Banks Exploit Commodity Market).
This was followed by two days of testimony by the Fed Governor, Tarullo and the bank officials. In this testimony, Tarullo provided a brief insight into the history of banks' physical commodity business as well as the present rules and the Fed's ongoing review of the same.
History & Rules Governing Banks' Commodity Businesses
Prior to the enactment of the Gramm-Leach-Bliley Act in 1999 (GLB Act), the banks were authorized by the Fed to engage in a narrow set of commodity activities that were deemed to be closely related to the core banking businesses. Further, under the National Bank Act, the Office of the Comptroller of the Currency (OCC) had approved banks to engage in commodity-related operations that were considered necessary for carrying out normal banking businesses.
Nevertheless, under the GLB Act, banks with properly managed and well capitalized banking subsidiaries were given permission to engage in expanded financial services. The expanded financial services also included commodity activities through the three provisions of GLB Act.
Those firms which were not bank holding companies prior to the enactment of GLB Act but later on become holding companies, are also permitted to engage in physical commodity activities. At present, both Goldman and Morgan Stanley fall under this category.
Further, in 2008, JPMorgan and Bank of America Corp. (NYSE:BAC-Free Report) acquired Bear Stearns and Merrill Lynch, respectively. Both Bear Stearns and Merrill Lynch were engaged in significant amount of commodities trading activities. However, the range of physical commodity activities for JPMorgan and BofA is limited as they were banking holding companies before the acquisitions.
Supervision of Commodity Businesses of Banks
Though not directly involved in supervising commodity market, the Fed supervises overall risk profile and risk management capabilities of banks. The primary focus of the Fed remains on financial strength, corporate governance and risk-management practices of banks.
Bank holding companies that are engaged in physical commodity businesses are subjected to additional scrutiny. This includes review of internal management reports, meetings with the executives responsible for managing and controlling the risks of the bank's commodities activities, along with targeted examinations of those activities. The aim of such review is to monitor the adequacy of banks' risk management abilities for commodity businesses.
The Fed requires banks to hold additional capital to absorb probable losses while being engaged in physical commodity activities. Despite this, banks' physical commodity business poses a threat to the safety and stability of financial system as it is difficult to estimate the damages related to environmental or catastrophic incidents.
Road Map for the Future
Since Jan 2014, the Fed has invited public comments through Advance Notice of Proposed Rulemaking (ANPR) on physical commodities activities of the banks. Under ANPR, the Fed is exploring additional restrictions and limitations regarding banks' commodity-related activities. These may include increased insurance or capital requirements, cutbacks in the maximum amount of assets or revenue generated from such activities and prohibitions on holding certain types of physical commodities that could lead to undue risk to the bank's stability.
Notably, in response to the Fed's notice, several comments from members of Congress, individuals, public interest groups, academics, end users, banks and trade associations were received. These views offered the pros and cons of the banks involvement in physical commodities businesses.
Apart from this, several suggestions to further strengthen oversight into banks' physical commodities businesses were also presented to the Fed. The probable safeguards included boosting public disclosures, enhancing capital requirements and establishing risk management capabilities.
Notably, bank officials, while testifying before the Senate Committee, had maintained that risks arising from their physical commodity businesses are effectively managed. Despite this, the Fed is planning to issue a formal notice of public rulemaking related to the matters concerning banks' stakes in commodity market in the first quarter of 2015.
We believe that increased regulations on banks' physical commodity operations will go a long way in improving insight and aiding proper oversight. This would also alleviate risks to the U.S. financial system to some extent.
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