Large US Companies Willing to Accept Higher Funding Costs for Market Stability

New research from Greenwich Associates shows that large US companies support the imposition of tighter capital reserve requirements on banks – even if the new rules increase their own funding costs.

Credit conditions for large US companies are improving dramatically in 2010. However, as corporate demand for capital picks up in step with the economic recovery, ongoing efforts to reform bank regulations stand as a wildcard. Companies broadly agree that tighter regulations on banks are likely to have at least some negative impact on the availability of credit and costs of funding. Despite that recognition, corporate support for several core elements of the financial reform bills now under debate in Washington remains strong.

“The results of our new Greenwich Market Pulse show that large US companies see stability in the financial system as a critical goal, and one for which they are willing to pay a price,” said Greenwich Associates consultant John Colon. “The danger at the moment is that no one in Washington or elsewhere in the country can determine precisely what the impact of this massive piece of legislation will be on credit markets. Therefore, there is no way to know the costs that companies will ultimately be forced to bear in terms of increased costs of capital.”

Companies Support Tighter Bank Capital Reserves

The results of the Greenwich Market Pulse reveal that approximately 65% of large US companies favour the imposition of tighter capital reserve requirements on banks, even if the move makes credit less available and more expensive. Less than 5% of these companies are opposed.

“Six-in-10 large companies think higher capital requirements for banks will have a negative impact on credit availability and about 55% think it will increase their own costs of capital,” said Colon. “But almost three-quarters of these companies believe tighter reserve requirements would have a positive impact on the stability of the financial system overall. They are apparently willing to absorb higher costs in return for that stability, although how much of a cost increase they would accept is unclear. One can speculate that smaller companies with fewer financial resources and less flexibility might be less willing to pay this price.”

Derivatives and Securitisation Reform

In the Greenwich Market Pulse, approximately 45% of large US companies said they support regulations that mandate centralised clearing for over-the-counter (OTC) derivatives, with 24% opposed and 31% essentially neutral on the proposal. Companies are most concerned about the impact mandatory centralised clearing would have on their ability to tailor derivatives transactions to specific exposures. Approximately 40% of companies think centralised clearing would significantly impede their ability to do so. Thirty percent of companies are also concerned that a shift to centralised clearing will over time increase their overall funding costs.

Companies favour focused measures designed to reform and strengthen the securitisation process. Approximately half of US companies favour new rules that would require securitisation issuers and sponsors to retain credit risk, as opposed to selling off the entire amount. Only about 5-10% of companies oppose such a measure, with the remainder undecided.

Bank Structure and Systemic Risk

Approximately 50% of US companies support the reform proposals included in what is commonly referred to as the ‘Volcker Rule’, which would restrict banks from engaging in proprietary trading not related to customer facilitation and place other limits on bank’s ability to invest in hedge funds, private equity and other ‘speculative’ investments. Only about one-in-10 companies say they oppose such measures, with the remainder undecided. “Taking that sentiment one step farther, 45% of the companies favour reinstating Glass-Steagall-style provisions that would entirely separate investment banking and commercial banking activities,” said Greenwich Associates consultant Steve Busby.

Companies are much more sceptical about reform measures that would vest considerable new powers in the Fed and other agencies to identify individual firms as systemically important and to limit their size or take other actions aimed at addressing levels of systemic risk. US companies are divided in opinion about proposals to create a government entity empowered to act on systemic risks through actions such as those outlined in the Dodd bill. Roughly three-in-10 companies are supportive of the idea, and equal share oppose, with the remainder neutral or undecided.


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