Studies by Nela Richardson
Three days after a Bloomberg Government study, “Unraveling Dodd-Frank’s Push-Out Rule,” produced data that undermined assumptions underlying the swap push-out rule, the House Financial Services Committee discussed a proposed bill that would repeal the rule. The committee approved amended legislation limiting the push-out rule’s reach. Commodity and equity derivatives, targeted by the rule, are no more risky than any other kind of derivative, according to a database of derivatives trading from 2006 through 2011 that Bloomberg Government compiled from bank call reports. The amended House bill removes commodity and equity derivatives from the rule.
“U.S. Banks Face Increased Swap Costs, Foreign Competition,” the second part of the study, examines the push-out rule’s impact on U.S. commercial banks. It finds that regional banks with assets between $10 billion and $50 billion will be significantly affected because they provide customer-driven risk management products to mid-market companies.
Part 3, published today, shows that the rule will also change the way U.S. bank holding companies deal with derivatives, even though lawmakers wrote the provision to target insured commercial banks. Ten of the 25 largest bank holding companies have at least 90 percent of their push-out derivatives in their commercial banking arms, as of the third quarter of 2011. JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co and HSBC North America Holdings Inc. are among the bank holding companies that may bear the brunt of extra costs.
The swap push-out rule may tilt market share in the already concentrated derivatives market toward Goldman Sachs Group Inc. and Morgan Stanley, which became bank holding companies during the financial crisis. Such an outcome may increase the systemic risk associated with the largest banks, which runs counter to the intention of Dodd-Frank to decrease systemic risk.
Nela Richardson is an economic analyst with Bloomberg Government. Nela was a research economist at the Commodity Futures Trading Commission before joining Bloomberg. She was also a senior economist at Freddie Mac, a researcher at Harvard’s Joint Center for Housing Studies, and an adjunct professor of finance at John Hopkins. Richardson has a Ph.D. in economics from the University of Maryland, a M.A. from the University of Pennsylvania, and a B.A. from Indiana University.
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