Wall Street Regulations Have Main Street Consequences, Experts Say

Jun 20, 2012

Some of the rules currently being written by regulatory agencies as part of the Dodd-Frank Act threaten businesses ability to manage risk, daily cash flow, raise capital, and ultimately grow and create jobs, according to financial experts attending a U.S. Chamber event.

Corporate treasurers, financial professionals, academics and association representatives reviewed a list of pending regulations at an event titled “Cumulative Impacts of Financial Regulations: Are We Hindering Economic Recovery?” The answer to that question was a resounding yes, according to attendees.

“We’re used to post-crisis pendulum swings,” said David Hirschmann, the president and CEO of the Center for Capital Markets Competitiveness. “Business isn’t complaining about more regulations. All we ask in return is that they coordinate with each other and consider the cumulative impact of the many rules at play.”

The Volcker rule, money market fund reform, derivative regulations and increased capital standards under Basel III, have “very real consequences in how business is done,” Hirschmann said.

For example, reforming money market funds would reduce a company’s ability to raise and invest short-term capital, said Brad Fox, Vice President and Treasurer of Safeway Inc. Safeway needs short term funding and the commercial paper market is the best and most efficient way to raise those funds, Fox explained. “Imposing more rules and regulations on money market mutual funds is unnecessary and threatens to wipe out a vital and safe source of business financing,” Fox said. Fox will raise these issues during a June 21 Senate Banking Committee hearing with SEC Chairman Schapiro.

Without money market funds, Safeway and other companies like it would also face higher financing costs because they will be forced to seek financing from banks and other lenders with higher fees and interest rates, Fox said.

Those higher fees and interest rates will be passed on to consumers, according to Jim Gilligan, assistant treasurer of Great Plains Energy Inc. and a member of the Association of Financial Professionals board of directors.

If investors abandon money market fund accounts because they become over-regulated, borrowers would be forced to go to banks to draw on their revolving credit lines. Because banks are impacted by the Volcker Rule and Basel III, which limit the types of activities that banks can be involved in and increases their capital holding requirements, the banks will likely lend at a much higher interest rate. Companies will then be forced to pass those rates on to consumer through higher prices on goods and services, Gilligan explained.

Also speaking at the event was Georgetown University Professor James J. Angel who recently authored a white paper titled, “Money Market Mutual Fund Reform: The Dangers of Acting Now.” Angel spoke about the broader impact of possible reforms to money market mutual funds on businesses, municipalities, individual investors and the overall economy. Rather than reining in system risk as intended, reforms to money market mutual funds would have the opposite effect and increase systemic risk, he said.

Derivatives are another important investment vehicle that allows companies to hedge risk and lock in certain terms such as interest rates, said Peter Wallison of the American Enterprise Institute. Companies such as Gilligan’s also use it on a commodity buy natural gas, coal and nuclear fuel, he said.

For now, corporate treasurers such as Gilligan and Fox are being forced to try to plan for a cautious and uncertain future, Hirschmann warned. 

 

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