US banks’ exposures to commodity trading rise amid conflict with Russia

Gold bars and coins are stacked in the safe room of the Pro Aurum gold house in Munich, Germany August 14, 2019. REUTERS/Michael Dalder/File Photo/File Photo

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NEW YORK, April 18 (Reuters) – Wall Street banks’ exposure to commodity trading is rising, which could leave them vulnerable to sharp swings in asset values ​​after Russia invades Ukraine , showed the results of the first quarter.

Goldman Sachs Group Inc (GS.N) and JPMorgan Chase & Co (JPM.N) both reported a slight increase in the commodity trading risk metric, with Goldman now the highest in a decade, a review found. Reuters bank deposits.

Markets for oil, gas, wheat and precious metals have become more volatile since Russia invaded Ukraine and Western countries imposed sanctions on Russian trade. Read more But the results so far suggest that banks are managing risk effectively.

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The London Metal Exchange (LME) halted nickel trading last month after prices doubled to over $100,000 a tonne. Sources blamed the price spike on short-term hedging by one of the world’s leading producers.

Wall Street used to be big commodity traders, but they fell back after the 2007-09 financial crisis as tighter regulations restricted their ability to trade with their own money and led to higher costs and lower trades. profits.

But banks’ exposures to commodity trading have steadily increased over the past two years as the Federal Reserve injected liquidity into capital markets.

The Fed’s actions pushed asset values ​​higher and triggered massive investor buying, disrupting the normal functioning of the market and creating a windfall for investment banks dealing in gold, silver and other precious metals.

Goldman Sachs Group Inc’s (GS.N) daily average value-at-risk (VaR) in commodities totaled $49 million in the first quarter of 2022, down from $32 million in the prior quarter, and its highest in more than a decade. a decade, the bank said on Thursday.

This was above the average VaR of $33 million the bank had in equity trading and $25 million in currency trading.

A bank’s VaR shows how much money it could lose trading a particular asset in a single day. For commodities, this covers physical assets like gold and nickel and investment and hedging tools like derivatives that allow investors to profit from commodities without owning them.

JPMorgan Chase & Co’s (JPM.N) daily average trading VaR in commodities reached $15 million in the first quarter, up from $12 million in the prior quarter and topping $12 million for stocks and $4 million for currency.

“Rising commodity prices have led to increased counterparty credit and market risk,” Chief Financial Officer Jeremy Barnum told analysts on a conference call.

As commodity trading exposures rise, results so far show banks are making money. Goldman reported a 21% increase in fixed income, currencies and commodities (FICC) trading revenue. JPMorgan’s fixed income trading revenue fell 1% from an exceptionally strong performance a year ago.

Citigroup (CN) does not report VaR alongside its earnings. Its latest disclosures showed the bank’s VaR in commodities was up year-over-year for every quarter in 2021, peaking at $48 million at the end of the second quarter.

Morgan Stanley (MS.N), which has reduced the size of its commodities trading business since the financial crisis, does not break down its VaR by asset class.

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Editing by David Gregorio

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