Securities and Exchange Commission economists are throwing cold water on Wall Street’s persistent complaints that post-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 Division of Economic and Risk Analysis 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 a range of asset classes, including equities, government and corporate bonds as well as derivatives.
The SEC economists said that their analysis didn’t find a decline in total issuance of securities following the enactment 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 agreed to start revising it, people familiar with the matter have said. In June, the Trump administration made the case for easing many of the strictures that were imposed on Wall Street after the financial crisis.
When Wall Street firms criticize the impact of post-crisis rules, they frequently cite the events of Oct. 15, 2014, when 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 & Co. CEO 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, which restricts banks from making bets with their own capital, damped trading in U.S. Treasuries.
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.”