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Will "lenders" stop lending? Will money funds be moot? Will the Fed's power grow?
Alix Stuart, CFO Magazine
July 15, 2009
The financial-reform express is moving faster than ever, thanks to a sweeping set of proposals that President Barack Obama sprang on Congress last month. Increased oversight for banks, hedge funds, and OTC derivatives seems likely, as does more Treasury oversight for nonbanks that have systemic importance to the economy, such as AIG.
Much of this could be good news for CFOs, ushering in safer capital markets and lower counterparty risk. Depending on how the proposals play out, however, they could have major implications for how companies borrow and invest money, not to mention a variety of other corporate consequences.
One key question is whether the new rules will make banks less appealing as sources of corporate credit. Banks would be required to hold more capital against their loans, while loan originators may have to hold 5% of any assets they securitize. Three new entities — a National Bank Supervisor, a Consumer Financial Protection Agency, and an uber-regulator known as the Financial Services Oversight Council — would gain authority to require reports from banks. "It's almost impossible to think that higher capital requirements and additional scrutiny won't reduce the lending appetite on the part of banks," says Jason van Tassel, senior director of research for the finance and strategy practice at the Corporate Executive Board. He says his group is counseling corporate treasurers to "expect less bank lending and to start preparing for alternative sources of funds," including private placements with hedge funds, which are likely to be safer if the funds are more regulated.
The impact of many other proposals on corporate finance is up for debate. A directive for the Securities and Exchange Commission to "reduce the susceptibility of money-market mutual funds to runs" could make such funds a more attractive investment, says van Tassel. However, if the effort leads to eliminating the $1 stable net-asset-value requirement for the funds that currently protects their principal, corporate treasurers are likely to flee, bringing down the overall volume of such funds, says Cathy Gregg, a principal with consultancy Treasury Strategies, which recently polled treasury executives about the proposal. If money-market funds shrink, Gregg expects the commercial-paper market to shrink correspondingly, particularly for longer loans and lower-quality borrowers. That may force companies to find other sources of short-term financing.
Beyond the proposed banking rules, a potpourri of other recommendations also looms. Companies like Wal-Mart, Harley Davidson, and General Electric may reconsider their holdings of lending units in the face of proposals to expand Federal Reserve authority to cover more nonbanks, while small companies may be forced to offer workers IRA plans and OTC derivatives may be subject to new oversight.
To be sure, nothing is set in stone — and won't be for some time. "There is going to be a very, very robust discussion about what the final version looks like; it definitely needs modification," says Joseph Lynyak, a partner at law firm Venable LLP who represents banks and other financial institutions.