Banks would have to hold up to $4bn in extra capital if they trade hazardous materials such as oil and natural gas under a proposed US regulation meant to lessen the risks of spills, explosions and other catastrophes.

The Federal Reserve on Friday released a proposed rule governing Wall Street’s involvement in physical commodities that would stiffen capital requirements, tighten limits on trading activity, remove banks from the business of running power plants and restrict their activities in the copper market. Banks that remain in the market despite the new restrictions would have to report their commodities holdings to the public, writes Gregory Meyer in New York.

The proposals come after years of deliberation during which many of the largest banks on Wall Street curtailed or exited the physical commodities business. Pressure from the Fed and the collapse in global commodity markets hastened their retreat.

The bank likely to be hardest hit by the rule would be Goldman Sachs, which has stood by its vast commodities franchise, known as J Aron, delivering crude oil to refineries and natural gas to utilities across North America.

Fed staff said in a memo that the rule would “better address the potential legal, reputational, and financial risks posed by such activities, particularly those that can result from an environmental catastrophe.”

Since 2003, the Fed has given authority to 12 banks to wade into the physical commodities trading business, a province traditionally dominated by commercial merchants and producers such as BP, Cargill or Vitol. But US lawmakers have raised questions about the risks of these businesses to the banks and the financial system.

Under the Fed proposal, banks using this authority would have to assign a risk weight of 300 per cent to their physical commodity holdings. For example, a tank holding $1m of petrol would have a risk weight of $3m. Based on a 10 per cent capital requirement, this would entail an additional $300,000 of capital held by the bank.

Two banks, Goldman Sachs and Morgan Stanley, were under a 1999 law grandfathered to allow them to own pieces of commodities infrastructure such as power plants and oil terminals. Any commodities or assets held under this exemption would have a punitive 1,250 per cent risk weight, meaning capital equal to the underlying asset.

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