Russian Invasion Increases U.S. Banks’ Commodities Trading Risk

U.S. banks are reporting increased risk in commodities trading following Russia’s invasion of Ukraine, but signs indicate that Wall Street is managing the fluctuations in asset values, according to first quarter earnings reports.

Goldman Sachs showed a decade-high increase in a commodities trading risk measure, the Value at Risk (VaR), and JPMorgan Chase reported a rise as well, according to Reuters. Goldman’s VaR totaled $49 million in the first quarter of 2022, an increase of $17 million over the prior quarter. It had averaged $33 million for equities trading and $25 million for currency trading. The VaR represents the amount of money a bank could lose by trading an asset in a set time period – in this case a single day.

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After Western countries issued sanctions against Russia, oil, gas, precious metals, and wheat markets became volatile.

"Price increases across commodities resulted in higher counterparty credit and market risk," JPMorgan’s Chief Financial Officer, Jeremy Barnum, told analysts on a conference call.
Despite increased risk, indicators suggest that banks are making money. Goldman reported a 21% increase in fixed income, currencies, and commodities trading revenues. JPMorgan's fixed income trading revenues dropped 1% from where they were a year ago, though its performance then was unusually strong.

Wall Street banks decreased their commodities trading after the 2007-09 financial crisis, when tighter regulations restricted their ability to trade with their own money, leading to rising costs and lower profits. As the Federal Reserve has infused capital markets with liquidity during the past two years, banks’ trading exposures have been inching up.
Asset values have risen, causing huge investor purchases and creating a windfall for investment banks dealing in gold, silver, and other precious metals.