An intriguing article in the FT by commodities editor Neil Hume asks the question, “Are commodities traders ‘too big to fail’?”
Unfortunately the “too big to fail” moniker has been applied to just about everything since the financial crisis gave recognition to the idea that some institutions – notably major banks – are too big to be allowed to fail, the damage to the economy, so the theory went, being more severe than the cost to taxpayers to bail them out.
Whether any of the banks truly were too big to fail is an issue we can debate, but the central argument goes that some organizations are so dominant in a particular industry and indeed to the economy of one or more countries, that to allow them to fail would risk failure of the entire system in which they operate.
For banks, this would be the financial structure of the country, but arguably firms that play a leading or pivotal role in other areas could be said to represent systemic risk too, both financial in nature and in terms of supply of critical commodities.
What About the Glencores of the World?
According to Mr. Hume, the Global Financial Markets Association (a banking lobby group, it must be said) commissioned a report on commodity trading houses, and the idea was to show trading houses like Glencore Xstrata, Vitol or Cargill were “too big to fail” and therefore needed to be regulated in a similar manner to the banks.
When the report found trading companies posed less systemic risk than the big banks, the report was not published, but when a separate report published in July by the Centre for European Policy Studies, a think-tank, argued the growth of commodity trading houses, which underpin the global trade in raw materials, could “have systemic” implications, the trading fraternity began to smell a rat.