Commodity trading risks on Wall Street banks are rising, which could leave them vulnerable to large fluctuations in asset values due to the Ukraine crisis, Reuters reports.
Goldman Sachs Group Inc and JPMorgan Chase & Co reported rising risk metrics in commodities trading, with Goldman risk now the highest in a decade.
Markets for oil, gas, wheat and precious metals have become more volatile after the escalation of the Ukrainian crisis and the imposition of sanctions against the Russian Federation. But the results show that banks manage risk effectively.
The London Metal Exchange (LME) suspended trading in nickel last month after prices doubled to over $100,000 a tonne. Sources blamed the rise in prices on covering short positions by one of the world's leading producers.
Wall Street banks were once big commodity traders, but since the financial crisis of 2007-2009, they have scaled back their activities as tighter regulations limited their ability to trade their own money, driving up costs and shrinking profits.
But banks' exposure to commodity trading has gradually increased over the past two years as the Federal Reserve pumped liquidity into the capital markets.
The Fed's actions pushed asset prices up and sparked massive investor buying, disrupting the market and creating a bonanza for gold, silver and other precious metals investment banks.
The average daily cost of risk (VaR) of Goldman Sachs Group Inc in commodities was $49 million in the first quarter of 2022, up from $32 million in the previous quarter, the highest in more than a decade.
A bank's VaR shows how much money it can lose by trading a particular asset in one day. For commodities, this includes physical assets such as gold and nickel, as well as investment and hedging instruments such as derivatives, which allow investors to profit from commodities without owning them.
JPMorgan Chase's average daily VaR for commodities rose to $15 million in the first quarter from $12 million in the previous quarter and topped $12 million for equities and $4 million for foreign currencies.