Volcker Rule Will Be a Grinch to U.S. Capital Markets
Business men and women of Whoville beware: Paul Volcker may be swiping your Christmas cheer.
Yesterday, federal regulators voted to approve the Volcker Rule, named after former Federal Reserve Chairman, Paul Volcker.
While the Volcker Rule seeks to ban proprietary trading, it goes beyond that. Congress and regulators may have shot at Wall Street, but they will hit Main Street instead.
Ultimately, the Volcker Rule restricts the ability of financial institutions to underwrite stocks, bonds and make business loans. How do businesses get the cash to grow and operate? Exactly – through the issuance of stocks, bonds and loans. Even the European Union that favors more regulation has thought this is a leap too far.
Rather than create a new, complex regulatory structure to have five regulators subjectively decide if trades comply with the Volcker Rule, the U.S. Chamber proposed an alternative in 2010 to go with higher capital requirements to achieve the purpose of the Volcker Rule. Over the past couple of years the Chamber has submitted more than a dozen letters and studies to regulators outlining the potential negative impacts of the Volcker Rule on corporate treasurers. The Chamber has asked regulators to re-propose the Volcker Rule identifying and fixing unintended consequences before the Rule goes into effect. A re-proposal would have ensured a fair rulemaking process. Instead, regulators decided it was more important to get the Volcker Rule done before the end of the year rather than get it right.
How will businesses react? By putting more cash away to use for a rainy day. The Chamber has estimated that businesses may have to build up cash reserves by as much as $800 billion dollars to counteract the inefficiencies the Volcker Rule will place on American capital markets. This will take $800 billion dollars out of the productive economy and sideline it, and place pressure on the Federal Reserve to continue its quantitative easing to prop up the economy.
It doesn’t sound like the Volcker Rule is the answer for the equation needed for sustained economic growth and job creation.
Oh, the Whomanity!