Not surprisingly, this election year will shape up to be an ideological battle royal between proponents of free-market capitalism and those that would impose some constraints on unfettered capitalism in the form of regulation.
Back in 2010, the Dodd-Frank Act was passed in order to address some of the abuses by financial institutions that led to the financial crisis. Getting the bill passed turned out to be the easy part; instituting the vast array of rules has become more of a challenge. Between underfunded regulatory agencies and political squabbles in Congress, it's been slow going.
When considering new regulations, government agencies or regulators typically invite comments from the public and the industry. The comment period for one of the more well-known rules, the Volcker rule, ends today.
The rule would limit the amount of trading banks are allowed to do in their own accounts. By disallowing speculative investments, banks would be limited in the amount of risk they could take on. Instead of striving to profit from investments, regulators say, banks should focus on the business of banking, not making outside bets on questionable assets.
Conflicts of interest would also be minimized by separating consumer banking from investment banking activities.
It sounds good, but opponents say there will be unintended consequences including reduced liquidity in the corporate bond market and increased transaction costs for consumers.
One recent study by the consulting firm Oliver Wyman attempted to quantify some of those costs.
From the study, conducted for the Securities Industry and Financial Markets Association:
Our analysis is limited to clear first-order impacts, including
- Mark-to-market decrease in value on existing bonds due to loss of liquidity.
- Higher interest rates paid by corporate bond issuers, due to investors demanding greater liquidity premia.
- Increases in transactions costs paid by investors, directly due to trading lower liquidity instruments.
The study estimates that investors could see a potential mark-to-market valuation loss of $990 to $315 billion.
As well, on an ongoing basis, "issuers will have to pay higher yields on new debt raised to compensate investors for holding less liquid assets," the study says.
The estimated annual costs to issuers is $2 to $6 billion in the first year and $12 to $43 billion after all outstanding debts have been refinanced at the higher rate.
Finally, the lack of liquidity will cost investors to the tune of $1 billion to $4 billion, the industry-sponsored study found.
What do you think?
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