Nov. 7 --A business group recommends federal agencies step back and regroup on a key part of the financial regulatory overhaul, saying the proposed ban on proprietary trading by banks needs to be re-evaluated for its impact on the economy.
The letter by the Chamber of Commerce's Center for Capital Markets Competitiveness was sent to the heads of the Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency as the regulators wrap up the so-called Volcker rule.
The chamber said a failure to understand the implications of the rule on businesses could lead to negative consequences that would hamper the ability of companies to access capital and create jobs. The proposal places the American economy at a competitive disadvantage and might violate existing trade agreements, the chamber said.
“We request that you re-propose the Volcker Rule in order to thoroughly evaluate the impact of additional regulation on American businesses, the broader economy and stop these negative consequences from occurring,” the letter said. “It is more important to get this right than to meet an artificially imposed deadline.”
The rule grew out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 as a response to the financial crisis. It was named after its architect, former Fed Chairman Paul Volcker. Implementation has been drawn out because joint rulemakings take time, as agencies work to strike a balance. Comptroller of the Currency Thomas Curry, talking to reporters after a speech in September, said the Volcker rule would be ready this year.
In its letter, the chamber said that while much focus on implementation of Volcker has been concentrated on the financial sector, little attention has been paid to the impact the proposal will have on capital formation for non-financial companies. It said for the full effects of the rule to be understood, the proposal must be considered in conjunction with other regulations, including the Basel III capital standards.
“For non-financial companies, any one of these changes will cause the cost of capital to rise,” the letter said. “The cumulative impact of all of these impending changes plus the Volcker Rule is that many firms, particularly smaller ones, will likely be completely shut out of capital markets. Others may not be able to access bank lending or find they are unable to adequately hedge risk in certain circumstances. This will make the overall economy less stable and less conducive to growth.”
One of the concerns among banks and other companies has been that the controversial rule would have unintended consequences. A recent report says regulators have had trouble distinguishing between impermissible trading and permissible activities such as market making and hedging.
“The Volcker Rule Proposal creates ambiguities as to appropriate market making and underwriting activities that are critical to capital formation for non-financial businesses,” the letter by the chamber said.
If the final rule doesn't address issues raised by commenters, banks and other financial companies might curtail their participation in markets in order to avoid potential violations of law, or not engage in permissible activities in order to avoid a trade-by-trade regulatory compliance analysis, according to the letter.
“This could dramatically reduce the marketplace for corporate debt and equities, thereby reducing market liquidity which will cause typical transaction spreads to widen and place the U.S. capital markets at a competitive disadvantage as no other nations are imposing a Volcker Rule,” the letter said.
The chamber cited deficiencies with cost-benefit analysis. “The regulators have provided no analysis of costs and benefits that would result from the proposed regulations,” the letter said. “Instead, they have asked the public to provide this analysis.”
It said the agencies cannot rely on the cost-benefit analyses submitted by commenters in promulgating a final rule because those have not been subject to public comment. “Whether the agencies develop a more robust economic analysis on their own to inform their regulatory determinations, or through submissions by commenters, they must re-propose the rule with that additional analysis.”
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