Is FinServ Reform Losing Sight Of Economic Growth?

Last week, reports emerged that the U.S. Chamber of Commerce uncovered the challenge businesses face in the wake of financial reforms and regulations, like Dodd-Frank. According to a survey conducted by the chamber, there are negative effects of such legislative efforts, with businesses noting that they have been forced to increase prices for their customers as a result of regulatory impacts or have had to delay or cancel investments for growth.

Nearly 80 percent said they had taken some kind of measure to make up for the financial cost of compliance.

But the Chamber of Commerce’s report goes beyond identifying the challenges of U.S. corporations in the wake of the Dodd-Frank Wall Street Reform and other legislation. Its survey, the chamber said, suggests that the nation must heighten its capabilities of providing finance to its businesses, especially those struggling on account of regulation.

“Without a robust financial services supply chain, our nation cannot finance adequate economic growth,” the report said in its executive summary. “Regulatory efforts to ensure financial stability must be accompanied by equally vigorous, data-driven analysis to make certain that Main Street companies continue to have access to the financial services they need.”

Already, the Chamber of Commerce found, businesses are looking anywhere and everywhere to access finance.

In the survey, the majority of businesses said they use all eight types of financing — cash management tools, commercial paper, debt financing, derivatives, equity financing, long-term loans, short-term loans and trade financing — on a routine basis, while 85 percent said they use at least four of these tools.

The demand for choice is clear. According to the chamber, 86 percent of companies said they agree it is crucial for the financial services industry to offer an array of services.

But to satisfy this need for a range of financial services, these corporations are turning to multiple FinServ providers.

The research revealed that 20 percent of SMEs use at least four financial institutions to access services like corporate debt raising or trade financing. Larger corporations do the same to obtain long-term loans and purchase derivatives and other financing solutions.

What Regulation Does

Changes in the FinTech and financial services landscape have certainly changed the way businesses manage their cash. But regulation, the Chamber of Commerce concluded, plays a key role in those changes.

For instance, more than one-third of companies surveyed said they had taken either new or unexpected steps to manage cash in the last five years.

The survey also identified which regulations have placed the most pressure on companies. Half pointed to increased bank capital charges as the legislation that has led to an increased cost of compliance or other challenges for the business over the last few years.

Regulation of derivatives, money market mutual fund rules and the inability to hold cash deposits were also identified as significant causes behind corporate struggles.

Only 5 percent said regulation has not made business operations more difficult in some way.

Basel III regulations have the most negative impact for these companies, the firms said. The legislation, which came into effect January 1, 2015, aims to tighten banks’ risk management capabilities and requirements.

The Systematically Important Financial Institution (SIFI) regulations, which fall under Dodd-Frank, require that banks and other major corporations must adhere to more stringent capital standards and create a framework of action in the event of a failure. These rules, too, were high on the list of new legislation that is negatively impacting companies.

With maintaining cash flow cited by 43 percent of businesses as their top concern, the survey results may suggest that regulation hitting these financial institutions has made it more difficult for companies to access the financial tools they need to grow.

Only the PCAOB Audit Standards and U.S. and EU Derivatives Rules were cited as having a minimally positive impact on the businesses surveyed.

Further, a third of these businesses expect the negative impacts of regulation on their firms to get worse in the coming years.

While the Chamber of Commerce did not lay out a strategy to mitigate these negative impacts, the agency did suggest lawmakers need to keep the economic health of the nation’s businesses in mind when drafting regulations going forward.

“In an era where economic growth has been stagnant,” the chamber stated, “we find that existing and additional regulation of the financial services industry must strike a better balance between its impact on business and economic growth.”