Bridging the Divide Between Regulatory Reforms and the Real Economy
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After the financial crisis that rocked global markets in 2007, G-20 policy makers worked to devise new rules aimed at mitigating risk in the global economy.
U.S. Federal Reserve Chairman Ben Bernanke was asked in 2011 whether anyone has studied the cumulative effects of these financial reforms and their impact on credit availability and economic recovery. His response – “I can’t pretend that anybody really has. It’s just too complicated.”
That statement sums up the central issue at hand as a result of these massive financial reforms – while they were all designed to address specific risks and perceived market vulnerabilities, the convergence of all of these new regulations has created a state of play where the rules are constantly shifting and unexpected and unintended consequences are making it harder for businesses to compete.
In an attempt to bridge this divide and inject the business perspective into the G-20 policy making progress, the U.S. Chamber and other business groups around the world have joined together to form the B20 Coalition, to highlight how decisions made by policy makers affect the ways in which global businesses compete, invest, grow or fail.
To that end, this week we released a report that lays out our ideas for how to bridge the divide between the G-20 and the real economy, using snapshots from companies within the G-20 to highlight the potential effects of regulatory responses and improve the dialogue between political leaders, regulators and job-creators.
One of the companies highlighted in the report is Southwest Energy Company, a Texas-based firm that since 2005 has invested over $6.5 billion in its operations, all of which are located in the United States. These investments have led to substantial job creation, from 248 employees in 2004 to approximately 1,500 today, an increase of over 600 percent.
Speaking to a Senate Committee in 2009, Mark Boling, Southwestern Energy’s executive vice president and general counsel testified:
Our ability to…create thousands of job opportunities during this period was primarily due to our ability to generate a reliable cash flow from the sale of our natural gas production and to gain access to additional funds borrowed under our bank revolving credit facility. The ability to generate a reliable stream of cash flow was due in large part to our use of OTC derivatives to “lock in” natural gas prices.
But Dodd-Frank imposed mandatory clearing and margining for all OTC derivatives, causing a liquidity drain on Southwestern Energy, and other companies that took a conservative approach by choosing to prudently hedge their economic risks.
After analyzing the potential costs of posting cash collateral, Southwestern determined that during 2009, without hedging, Southwestern would have drilled 240 fewer wells in its Fayetteville Shale Project resulting in the loss of 1,500 jobs and a total economic impact to the state of Arkansas of $1.6 billion.
If independent energy producers are forced to post cash collateral for natural gas hedging activities, they will be unable to fully invest in their business, the exploration and production of natural gas. The additional cost from posting cash collateral would be substantial and necessarily require that independent energy producers reduce their capital investments, resulting in a dramatic reduction in drilling activity, fewer jobs and a significant decrease in domestic natural gas production. There is a real world effect to a mandatory clearing requirement for all standardized OTC derivatives.
The report uses other case studies from the U.S., the Netherlands, India, Germany and Turkey to illustrate how these new rules are impacting the global business community, and provides information for global leaders and regulators to consider the real world impact of their actions.
This is a critical time for the global economy, and we feel it is important to act now, before any further divergence between political expectations, regulatory responses and the reality of running a business can crimp growth prospects in all of our economies.