Fed says wild swings in commodity markets increase risk of ‘contagion’ that could hit global banks hard

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  • Wild swings in commodity prices markets increase the risks of “contagion” that could hit banks, the Fed warned.
  • He said the measures incentivize big “margin calls” that prompt institutions to shell out money to cover their losses.

The wild volatility of merchandise prices increase the risk of contagion that would hit global financial institutions hard, Federal Reserve warned, as he sounded the alarm over deteriorating trading conditions in major markets.

goods such as oil, metalsand wheat have had a rollercoaster ride in 2022, while stocks and bonds have fallen dramatically as investors digest the rise interest rateRussia’s invasion of Ukraine and rampant inflation.

Fed Vice Chairman Lael Brainard warned that the Russia-Ukraine war posed a particular risk to financial institutions trading commodities, speaking in a statement accompanying the Fed’s latest financial stability report on Monday. .

“Russia’s unprovoked war in Ukraine has triggered large price moves and margin calls in commodity markets, and highlighted a potential channel through which large financial institutions could be exposed to contagion. “, she said.

Contagion occurs when losses in one market cause institutions such as banks to withdraw from other markets, leading to widespread losses in a snowball effect.

The Fed pointed to a spike in the price of nickel in March, which left a Chinese tycoon facing huge losses and forced the London Metal Exchange to suspend trading. JPMorgan and other major institutions were heavily caught up in the chaotic episode.

He said clearinghouses, key intermediary institutions in financial trading, have sharply increased so-called margin calls on key markets such as oil futures, adding to pressure on major buyers and sellers. A margin call is a request to cough up more money to cover potential losses.

The central bank also said liquidity conditions have deteriorated significantly elsewhere, meaning traders in key global assets are finding it harder to buy and sell without moving the market.

“Although the recent deterioration in liquidity has not been as extreme as in some past episodes, the risk of a sudden and significant deterioration appears higher than normal,” the Fed’s report said.

“Liquidity was somewhat tight at times in the oil futures markets, while the markets for some other relevant commodities were subject to notable dysfunction.”

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