House Finanical Services Subcommittee on Capital Markets and GSEs
“The Impact of Regulations on Short-Term Financing”
Thursday, December 8, 2016
Key Topics & Takeaways
- Liquidity: ChairmanGarrett (R-N.J.) commented that while he hears concerns about liquidity from market participants, regulators are rejecting the notion of regulations having diminished liquidity. Deas responded that it will be evident in times of market stress.
- Cumulative Impact of Regulations: Rep. Royce (R-Calif.) asked whether U.S. regulators should conduct an assessment of the interaction and total impact of post-crisis regulations similar to the one done by the European Commission. Toomey said the European Commission’s effort provides a good framework for a similar study to be done in the U.S., with important parameters such as the interactions of rules, inconsistencies, and the impact on economic growth.
- Floating NAV: Rep. Messer (R-Ind.) asked whether the SEC’s floating net asset value (NAV) rule’s economic benefits justify its costs. Deas contended that they do not, and claimed that borrowing costs for companies have risen 25-30 basis points.
- Anthony J. Carfang, Managing Director, Treasury Strategies, a division of Novantas, Inc.
- Thomas C. Deas, Jr., Chairman, National Association of Corporate Treasurers
- Mike Konczal, Fellow, Roosevelt Institute
- Robert Toomey, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association
In his opening statement, Chairman Scott Garrett (R-N.J.) stated that the federal securities laws were put in place to protect investors, and not to be a roadblock to accessing capital for companies. He said Congress and regulators must make it easier for companies to access capital, especially as it becomes clear that “main street” is feeling the impact of hundreds of new regulations post-crisis.
Ranking Member Carolyn Maloney (D-N.Y.) said the financial crisis demonstrated problems with short-term financing markets, and that the aim of many post-crisis regulations was to reduce banks’ reliance on them. She argued that policymakers need to see “compelling evidence” of harm before considering rolling back regulations. Maloney also defended the Securities and Exchange Commission’s (SEC) money market fund rules, saying that repealing the floating net asset value (NAV) rule may not achieve anything and that investors will likely return to prime funds once they fully understand and are comfortable with the new rules.
Anthony J. Carfang, Managing Director, Treasury Strategies, a division of Novantas, Inc.
In his testimony, Carfang said regulations stemming from Basel III, Dodd-Frank and money market fund reforms were “bold experiments,” but lamented that they all “went into the test tube at the same time” and we are now seeing negative impacts on American businesses and consumers. He was particularly critical of floating NAV requirements that have “crushed” prime and municipal money market mutual funds, and endorsed H.R. 4216, the Consumer Financial Choice and Capital Markets Protection Act, as a “simple fix” to restore funding for stable value money market mutual funds and preserving them as an investment vehicle and financing tool.
Thomas C. Deas, Jr., Chairman, National Association of Corporate Treasurers
Deas, in his testimony, said he was fully supportive of efforts to protect main street companies from regulations that place an undue burden on job creators. While he supports the overall goals on increasing the financial system’s safety, liquidity and transparency, he called for a study of the cumulative impacts of reforms to assess their interaction and adverse effects. He criticized money market mutual fund rules that have taken over $1 trillion out of the market, and the Net Stable Funding Ratio (NSFR) for potentially resulting in higher funding costs for main street.
Mike Konczal, Fellow, Roosevelt Institute
Konczal, in his testimony, supported the SEC’s rulemakings for money market mutual funds, arguing that while they function as mutual funds, they have features resembling bank deposits that expose them to runs and blur the lines between banking and securities law. He said the rules would reinstate market-based pricing and transparency, and that it is difficult to find evidence of negative impacts on the economy because companies are still able to meet their borrowing needs.
Robert Toomey, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association
In his testimony, Toomey stressed the importance of striking a balance between regulation and economic growth, and that market participants have been raising concerns that reforms have resulted in reduced liquidity in fixed income markets. He said regulations that are risk-insensitive or target the same risk multiple times through overlapping rules weigh particularly heavily on vital market functions. Toomey recommended an assessment of the coherence and cumulative impacts of regulations, akin to the European Commission’s Call for Evidence, that would focus on potential conflicts between rules, treatment of low-risk high-quality assets, and the calibration of specific rules.
Toomey then discussed the importance of repo markets, describing them as providing the necessary “grease” that allows the U.S. capital markets to remain the most efficient and liquid in the world and facilitates lower cost credit to businesses, municipalities and the Federal government.
Garrett noted that most of the witnesses agreed that market liquidity had tightened, with dealers having cut inventory by around 80 percent. He asked what the reaction of the marketplace has been. Carfang replied that wider bid-ask spreads are leading to higher borrowing costs, with some companies choosing not to borrow and undertake new projects. Deas added that banks serve as intermediaries, but extra regulatory costs on them are ultimately born by the real economy.
Garrett commented that while he hears concerns about liquidity from market participants, regulators are rejecting the notion of regulations having diminished liquidity. Deas responded that it will be evident in times of market stress.
Cumulative Review of Regulations
Garrett suggested that part of the reason regulators cannot attribute diminished liquidity is because they have not undertaken a study of the cumulative impact of regulations, and they do not understand the real costs to the financial system.
Rep. Ann Wagner (R-Mo.) argued that regulations such as those from the Basel Committee and Dodd-Frank have diminished liquidity, and asked what resources the Financial Stability Oversight Council (FSOC) has committed to considering the problem. Deas said the FSOC has not done enough and that it still is not looking at the cumulative impacts and interactions of regulations. He said Congress should mandate that the regulators conduct such an assessment.
Rep. Ed Royce (R-Calif.) asked whether U.S. regulators should conduct an assessment of the interaction and total impact of post-crisis regulations similar to the one done by the European Commission. Toomey said the European Commission’s effort provides a good framework for a similar study to be done in the U.S., with important parameters such as the interactions of rules, inconsistencies, and the impact on economic growth.
Maloney asked if addressing the floating NAV issue alone would return investors to money market mutual funds, commented that some have identified gates and fees as a bigger issue. Carfang agreed that gates and fees are an issue, but that floating NAV is the “threshold problem.” He again praised H.R. 4216, saying it would “send a signal” to the SEC that Congress wants to preserve money market mutual funds.
Rep. David Scott (D-Ga.) asked whether the SEC had done a sufficient job of understanding the impacts of its floating NAV rule. Konczal answered that the SEC was very deliberate and took a long time to consider its rules and their impact.
Rep. Luke Messer (R-Ind.) asked whether the floating NAV rule’s economic benefits justify its costs. Deas contended that they do not, and claimed that borrowing costs for companies have risen 25-30 basis points.
Rep. Keith Rothfus (R-Pa.) spoke in support of H.R. 4216 and it makes it clear that taxpayers would not be on the hook to bailout a failing fund.
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