SEC re­buts claim on post-cri­sis rules

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - BEN BAIN

Se­cu­ri­ties and Ex­change Com­mis­sion economists are throw­ing cold wa­ter on Wall Street’s per­sis­tent com­plaints that post-fi­nan­cial cri­sis reg­u­la­tions have made mar­kets more sus­cep­ti­ble to shocks.

The mar­ket dy­nam­ics of re­cent years weren’t nec­es­sar­ily caused by stricter rules im­posed by U.S. and in­ter­na­tional reg­u­la­tors af­ter the 2008 fi­nan­cial melt­down, the SEC’s Eco­nomic and Risk Analysis Divi­sion said in a 300-plus page re­port to law­mak­ers re­leased Tues­day. The re­port ex­am­ines the ex­tent to which mea­sures such as the Vol­cker Rule and cap­i­tal re­quire­ments as­so­ci­ated with Basel III have af­fected trad­ing in a range of as­set classes in­clud­ing equities, gov­ern­ment and cor­po­rate bonds, as well as some de­riv­a­tives.

The SEC economists said that their analysis didn’t find a de­cline in to­tal is­suance of se­cu­ri­ties af­ter adop­tion of the 2010 Dodd-Frank Act. “It is dif­fi­cult to dis­en­tan­gle the many con­tribut­ing fac­tors that in­flu­ence” the sale of new se­cu­ri­ties, they wrote, adding that pri­vate mar­ket sales of debt and equities have “in­creased sub­stan­tially” in re­cent years.

The find­ings in the re­port, which was or­dered by Congress, will be un­wel­come news for big fi­nan­cial firms that have been com­plain­ing about the rules since they were en­acted. The in­dus­try has found sym­pa­thy among reg­u­la­tors ap­pointed by Pres­i­dent Don­ald Trump. Last month, the agen­cies that wrote the Vol­cker Rule — which re­stricts banks from mak­ing bets with their own cap­i­tal — agreed to start re­vis­ing it, peo­ple fa­mil­iar with the mat­ter have said. And in June, the Trea­sury Depart­ment re­leased a re­port call­ing for eas­ing many of the stric­tures

● that were im­posed on Wall Street af­ter the fi­nan­cial cri­sis.

The SEC re­searchers based their find­ings on “a com­pre­hen­sive as­sess­ment of a large body of re­cent re­search in ad­di­tion to orig­i­nal analysis,” ac­cord­ing to the re­port. The con­clu­sions “may dif­fer from those stated in the Trea­sury re­port” be­cause of dif­fer­ences in method­ol­ogy, the SEC said.

The SEC study was or­dered by Congress in De­cem­ber 2015. Law­mak­ers di­rected the agency to study how rules like Vol­cker and Basel III af­fected ac­cess to cap­i­tal and mar­ket liq­uid­ity. SEC com­mis­sion­ers, led by Trump-picked Chair­man Jay Clay­ton, didn’t weigh in on the find­ings or con­clu­sions, ac­cord­ing to the re­port.

When Wall Street firms crit­i­cize the im­pact of postcri­sis

rules, they fre­quently cite what tran­spired on Oct. 15, 2014. On that day, the yield of the bench­mark 10-year Trea­sury note plunged and then shot back up within min­utes. Yields had fluc­tu­ated that much only three pre­vi­ous times since 1998, and in each of those in­stances there was an ob­vi­ous cat­a­lyst. This time there wasn’t.

In the en­su­ing months, JPMor­gan Chase Chief Ex­ec­u­tive Of­fi­cer Jamie Di­mon said that the event should serve as a “warn­ing shot” to in­vestors. Black­stone Group CEO Stephen Sch­warz­man even ar­gued that reg­u­la­tions had made mar­kets so un­safe that they could trig­ger an­other fi­nan­cial cri­sis.

The SEC economists said they found “no con­sis­tent em­pir­i­cal ev­i­dence” that reg­u­la­tions in­clud­ing the Vol­cker Rule damped trad­ing in U.S. Trea­sury notes.

Af­ter Trump signed an ex­ec­u­tive or­der in Fe­bru­ary di­rect­ing agen­cies to ex­am­ine whether rules should be di­aled back, his top eco­nomic ad­viser, for­mer Gold­man Sachs Pres­i­dent Gary Cohn, said reg­u­la­tions had “taken an enor­mous amount of liq­uid­ity out of the mar­kets.”

There, too, the SEC economists said they weren’t so sure, at least for cor­po­rate bonds. For in­stance, the agency’s re­port noted that banks re­trenched from some trades af­ter the cri­sis to cut mar­ket risk.

“Ev­i­dence sug­gests that in re­cent years deal­ers have been less likely to en­gage in risky prin­ci­pal trans­ac­tions,” the re­port said. “With re­spect to the po­ten­tial reg­u­la­tory fac­tors be­hind ob­served liq­uid­ity changes, there is a lack of agree­ment in re­search re­gard­ing the di­rec­tion and mag­ni­tude of reg­u­la­tory im­pacts.”

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