Washington, DC – This week, Congressman Frank Lucas (OK-03) questioned Federal Reserve Chairman Jerome Powell and industry stakeholders from the CME Group and Futures Industry Association about the potential consequences that increased bank capital requirements could have on end-users of commodity derivatives.
End-users such as farmers, ranchers, and manufactures depend on derivates to manage risk. As commodities markets have experienced significant volatility due to global events, end-users have relied on these financial products to manage economic uncertainty. As banking regulators consider changes to Basel capital requirements, it is important to understand the impact this would have on commodity derivatives to end-users.
Click to here watch Lucas’ Q&A.
Lucas: “The U.S. banking regulators are in the initial phases of proposed changes to bank capital requirements. And as I raised to Federal Reserve Chairman Powell yesterday during his testimony before the Financial Services Committee, I’m concerned that this could increase the cost of hedging to end-users.
“Ms. Crighton, could you discuss potential adverse consequences to reducing access to these products, particularly during periods of financial uncertainty? If we make it harder to hedge, what’s going to happen when things get tough?”
Crighton: “I think it’s a topic we think about certainly within the firm and across the membership of FIA, and I think really across the panelists sitting at this table. When we think about the impact of bank capital on clearing members, one of the first topics that comes to mind is the amount of capacity that we’re able to provide in the system. When we engage with clients, when we work with clients and we think about providing access to global markets, there’s a few lenses that we’ll think about and analyze their portfolio. The first is from an exchange margin perspective, the second is from a risk perspective, and the third is from a bank capital perspective. One of those three will ultimately define the amount of capacity that we give. The more punitive that bank capital becomes, the harder it is for us to be willing to stand in and continue to provide that capacity. So, we do urge policymakers going forward, as capital rules are considered and reconsidered, to not continue to increase bank capital because it will further impact banks in providing the amount of capacity that they do.”
Earlier in the week, Lucas joined his colleagues on the House Financial Services Committee for a hearing on the Federal Reserve’s Semi-Annual Monetary Policy Report. Lucas questioned Federal Reserve Chairman Jerome Powell about the Federal Reserve’s consideration of increasing capital requirements, as well as the Federal Reserve’s attention to not being engaged in climate-policy making.
Click here to watch Lucas’ Q&A.