The Federal Reserve on Friday outlined a plan to limit Wall Street bets on the energy sector by forcing companies like Goldman Sachs and Morgan Stanley to hold more capital against such investments. Under current law, Goldman Sachs Group Inc and Morgan Stanley may invest in energy storage and transportation in ways that other banks cannot, but the US central bank's new plan would make such bets more costly.
Banks would have to hold more capital against energy and commodity investments under the plan. The Fed also contemplated other limits like banning Wall Street control of power plants and prohibiting bank holding companies from owning copper. At this stage the plan is only a proposal that is subject to comment and change. The Fed has opened a three-month window for comment. The Fed, which regulates the banking and financial services sector, said the new measures would help shield banks and the broader financial system from a costly mishap like the 2010 Deepwater Horizon oil spill in the Gulf of Mexico.
Under the plan, Fed officials said, banks would have to hold roughly $1 in capital for every $1 of energy infrastructure they owned. In the Fed's calculus of bank safety, that amounts to a 1,250 percent capital charge - the regulator's highest tariff for the riskiest investments. Wall Street would have to offer roughly $4 billion in fresh capital to satisfy the proposal.
Firms on Wall Street have already been scaling back their ownership of refinery, shipping and storage facilities in the face of scrutiny from regulators who have asked what benefit comes from banks in the raw material market. Morgan Stanley has decreased the value of physical commodity assets on its balance sheet to $321 million in 2015 from $9.7 billion in 2011. Goldman Sachs has shed much of its energy infrastructure, too, but the bank is still a major trader of fossil fuels.
J. Aron, Goldman's commodities arm, traded more natural gas than both Chevron and ExxonMobil in the second quarter of this year, according to Natural Gas Intelligence, a trade publication. The energy trader moved 5.42 billion cubic feet of physical gas in the United States during the period, more than 73 percent of the volume it did during the same time in 2011, according to data.
Morgan Stanley and Goldman declined to comment on the Fed's proposal. Between 2007 and 2009, commodities trading for banks like Morgan Stanley and Goldman accounted for as much as a fifth of their overall annual revenues. Although Goldman has scaled back its ownership of physical commodities, it has remained committed to trading. The bank during the second quarter of 2016 earned more from that business than any of its Wall Street peers, according to data provider Coalition. Tougher regulations conceived since the 2008 financial crisis, though, have push much of that trading business to specialists like Glencore Plc, Vitol Group and Mercuria Energy Group.
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