What do the Deepwater Horizon explosion, Hurricane Katrina, and the tsunami that hit Japan in 2011 have in common? Those disasters serve as the backdrop to potential new restrictions on commodity holdings by banks.
The problem, according to the Federal Reserve, is that catastrophes involving environmentally sensitive commodities—including oil, natural gas, coal, and agricultural products—can wreak economic damages “well in excess of the market value of the commodities involved or the committed capital and insurance policies of market participants.” The damages could have the potential to destabilize large banks and add risks to the financial markets. Liability could also exceed the liability insurance of financial holding companies and capital allocated to the activity. Also, significant costs associated with clean-up may be expressly excluded from insurance policies.
