Wall Street Increases Risk of Commodity Trading Exposure due to Russian Conflict

Commodity trading exposure has risen on Wall Street after Russia’s invasion of Ukraine, leaving banking companies vulnerable to significant fluctuations in asset values. According to Reuters April 18th..

Both Goldman Sachs Group (GSG) and JPMorgan Chase have reported rising risk indicators for commodity trading, according to earnings disclosures in the first quarter, with GSG reporting the highest rise in the last decade. increase.

The global fuel, grain and precious metal markets have become more volatile since the West and Japan imposed sanctions on Russia and restricted its trade and exports.

Last month, the London Metal Exchange (LME) said nickel as prices exceeded $ 100,000 per ton after China’s Tsingshan Holding Group, one of the world’s top metal producers, lost billions of dollars. The transaction has been suspended. Large short position on nickel futures.

Wall Street companies have been forced into commodities after the 2007-2009 financial crisis forced Congress to impose strict regulations by limiting the ability of U.S. banks to participate using their assets. Reduced major transactions in.

The Federal Reserve sent liquidity to the capital markets during the pandemic, encouraging Wall Street to gradually reinvest in large quantities in the commodity markets.

The central bank’s decision to stimulate the economy has boosted asset value and triggered large investor purchases. This move disrupted the normal workings of the market and caused a plunge in investment banks dealing with valuable commodities.

However, the average daily value at risk (VaR) of GSG products reached a total of $ 49 million in the first quarter of 2022, up from $ 32 million in the fourth quarter of 2021 to $ 33 million in stock trading. Well above the average VaR and $ 25 million in currency trading. ..

JPMorgan Chase reported an average daily VaR of $ 15 million for products in the first quarter of 2022. That’s an increase from $ 12 million in the previous quarter, up to $ 12 million in equities and $ 4 million in forex.

The risks posed by commodity trading exposure are increasing, but the two banks are making decent profits.

Goldman acknowledged a 21% increase in fixed income, currency and commodities (FICC) trading earnings in the previous quarter, but JP Morgan’s earnings fell 1% following last year’s very strong performance.

Citigroup, which does not report VaR along with revenue, said in its latest report that commodity VaR increased quarterly year-on-year in 2021 and peaked at $ 48 million at the end of the second quarter of last year. I disclosed that I did.

Morgan Stanley, who has not categorized VaR by asset class, has not been deeply involved in the commodity trading business since the last financial crisis.

So far, major banks appear to be effectively handling the increased risk, the International Monetary Fund (IMF) said. Position April 6.

“The global banking system has seen a significant capital increase prior to the pandemic and is very shock-resistant,” the IMF said in an online post.

According to the post, the international banking system has almost passed the major milestones of the post-pandemic global banking stress test. This test “provides banks around the world with the first assessment of potential shock and spillover.”

IMF Departmental paper Global stress testing includes 25-year bank-level data up to 2020 for 257 largest lenders from 24 developed countries and 5 emerging markets, which account for 70% of global banking assets. It states.

For each country monitored, “stress tests target the number of institutions needed to account for at least 80% of the assets of an individual banking system.”

This report was put together before recent concerns about the conflict in Ukraine, Russia’s withdrawal from international financial markets, and global stagflation.

The study affirms that the international banking system can absorb most of the shocks from adverse market developments such as those seen during the pandemic, but “related to the evolution of capital levels and policy space in 2021. Uncertainty still exists, to absorb new shocks. “

Reuters contributed to this report.

Brian Jung


Brian S. Jung is from New York City and is a resident with a background in the political and legal industry. He graduated from Binghamton University.