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UPDATE 2-Big commodity houses may pose new risks -Bank of Canada

by on September 25, 2012 9:24 pm GMT
 

Tue Sep 25, 2012 5:24pm EDT

* Says commodity houses could become systemically important

* Lane says strong currency a drag on the economy

By Scott Haggett

CALGARY, Sept 25 (Reuters) – Large commodity trading houses,
together with the physical trading operations of big investment
banks, are playing an increasingly prominent role in commodity
markets and may become systemically important, Bank of Canada
Deputy Governor Timothy Lane said on Tuesday.

In a speech to a Calgary business group on the relationship
between the financial system and commodity markets, Lane said it
was worth asking whether the losses a trading house incurs, or
the failure of a house altogether, would have a significant
knock-on effect on the financial system as a whole.

Global regulators are imposing stricter rules on the banking
industry to avoid a repeat of the 2008 financial crisis. These
include a tougher set of standards for banks designated
systemically important, or “too big to fail”, meaning their
collapse would imperil the broader industry.

“Just as the 2008 financial crisis revealed the need to
assess the systemic importance of institutions that play a
central role in particular financial markets, we should be
asking the same questions about institutions that are
interconnected with various commodity markets,” Lane said in a
copy of the speech posted to the central bank’s website.

Regulators have so far focused on banks considered
systemically important for the global industry, and are now
turning their sights to lenders considered key to national
industries.

Consumer nations across the globe have for several years
expressed growing anxiety about increased speculation and
volatility in commodity prices.

But Lane’s comments appear to be among the first to suggest
that some of the market’s most active players, who typically
trade much more in the physical market than in more speculative
derivatives, may have become so large that they merit the
tougher scrutiny being applied to the world’s biggest banks.

Major players in the space include Vitol Group, Morgan
Stanley and Glencore International Plc. Lane did
not name specific players.

“A number of big institutions, the systemically important
potentially large commodity trading houses that I talked about
are mostly not Canadian. They’re mostly operating in other
jurisdictions,” he said in remarks following his speech.

“They’re operating in an environment globally where interest
rates are expected to remain very low for a long time. And that
environment is one that involves the build up of risk.”

Separately, Lane noted the strong Canadian dollar has been a
drag on the Canadian economy for the last few years, but said
the central bank has no target for the currency’s level and
focuses instead on inflation targets.