Banks keep commods risk low after two big quarters

Reuters Business News
Posted: Jan 20, 2011 4:32 PM
Banks keep commods risk low after two big quarters

By Barani Krishnan

NEW YORK (Reuters) - Wall Street banks are not taking the kind of big risks they did in commodities just a few years back, even after one of the biggest commodities rallies in two straight quarters since the 1970s.

Oil, copper and corn prices are back to levels last seen before the financial crisis and the global economy is projected to do better this year, although the United States may be growing too slowly for investors' liking and China too fast.

Yet, investment banks such as Goldman Sachs <GS.N>, Morgan Stanley <MS.N> and JPMorgan <JPM.N> are not willing to stake as much money on raw materials as they were before financial markets crashed.

Although equity and commodity markets had seen double-digit rebounds in the last two years, investor confidence is nowhere near the pre-crisis levels, and that could deter banks from adding freely to risks, analysts said.

"It will take a few years for these banks to adjust," said Richard Bove, bank analyst for Rochdale Securities in Lutz, Florida.

Goldman, arguably the world's most powerful bank and one of the biggest commodities traders, showed in fourth-quarter results this week that its Value-at-Risk (VaR) in commodities had dropped to a near seven-year low. VaR indicates how much a bank is willing to lose in a day trading any asset class.

Morgan Stanley, the No. 2 investment bank after Goldman, showed that its commodities VaR was down about 20 percent for the quarter and down about 33 percent from pre-crisis levels.

At JPMorgan, the second largest U.S. bank, commodities risk was virtually flat for the quarter but down more than two-thirds from its 2008 peak.

These numbers came despite a 28.7 percent jump in commodity prices over the two last quarters combined, as measured by the Reuters-Jefferies CRB index <.CRB>. The last time the CRB rose as much for two consecutive quarters was when it climbed 29 percent in 2008 and 34.5 percent 1973.

Goldman's commodities VaR peaked at $51 million per day in the second quarter of 2008 when record high oil prices took the CRB up 20 percent. As commodity markets began to recover in the first quarter of 2009, rebounding from the financial crisis, Goldman again ramped up its VaR, to $49 million a day.

Since then, risk in commodities has generally been on the decline, not only at Goldman but across Wall Street.

Analysts have cited tougher trading conditions in all financial markets since the crisis, apart from caution by banks wanting to avoid the kind of disastrous trading results seen just before and after the collapse of Lehman Brothers.

"It's been a running theme for these banks for several quarters now," Bove said. "Is the industry undergoing a structural change with reduced trading, or is this just a function of inactivity and people unwilling to trade?"

(Reporting by Barani Krishnan; Editing by Lisa Shumaker)