One could be forgiven for thinking the Fed is confused about how U.S. companies actually operate.
The source of this perceived confusion: Bank regulators have proposed a sweeping set of rule changes, ominously referred to as the Basel III endgame, that
Michael Barr, the Federal Reserve Board's vice chair for supervision and primary architect of the proposal, has
Importantly, companies are not funded solely by loans. Many depend on the U.S. capital markets — the deepest and most liquid capital markets in the world — for accessible debt financing, which represents
As a former treasurer of a large U.S. corporation and a previous chair of the National Association of Corporate Treasurers, I know that capital requirements — on lenders we rely on — ripple throughout the economy. The Fed's proposed capital rules are a price increase for companies of all sizes and in all sectors. They would have a disproportionate impact on a variety of borrowers, from large multinationals that rely on America's banks for financial services to
Among other things, the proposal would make derivatives more expensive and less available to these end users. Derivatives allow companies in a wide range of industries to reduce their exposure to commodity price volatility.
Many large public companies fund their day-to-day cash needs in the U.S. commercial paper markets, including for derivatives settlements. The proposed rules would increase the costs of issuing commercial paper and ultimately these higher costs would drive another spiral of inflationary pressures.
And since companies conducting day-to-day operations always require backstops for unforeseen events, we all have arranged with our banks for committed credit lines to be continuously available. We pay a commitment fee for these dedicated lines of credit. The costs of higher capital requirements regulators are proposing would be passed directly to end users through increases in these fees.
A coalition of financial trade groups issued a joint comment letter asserting that the federal bank regulators' proposed capital rule lacked justification and evidence required by the Administrative Procedure Act, threatening legal action if regulators don't delay and significantly amend the rule.
Companies depend on derivatives provided by banks to improve their financial condition, liquidity and earnings prospects, and increase their creditworthiness. Derivatives serve critical functions in the broader economy and recent regulatory and market reforms have significantly enhanced the stability of derivatives markets.
By mitigating financial risks through derivatives, companies across industries are able to focus on improving their product offerings and expanding their core businesses, sustaining their employees' job security. Congress recognized the importance of facilitating access to hedging products for commercial end users in both the Dodd-Frank Act of 2010 and the Terrorism Risk Insurance Program Reauthorization Act of 2015. By exempting commercial end users from certain clearing and margin requirements, these laws have contributed to a healthy and efficient market, and regulatory changes that disrupt that balance would undermine these public policy benefits.
The capital proposal would make these financial services — all offered principally by the largest banks — more expensive, undoubtedly making it more difficult for companies to hedge at the most competitive prices.
When viewed in totality, the potential impacts of the proposal become clear. A recent
Although bank regulators appear comfortable
Regulators acknowledged the impact of higher capital requirements for capital markets activity "remains a research question needing further study." Now is the time to undertake that work rather than rush to finalize an ill-conceived proposal.
