The Impact of the New Financial Reforms on Institutional Cash Investments

This past September 15th marked the second anniversary of the Lehman Brothers bankruptcy filing and the start of a long, cold hibernation for many institutional treasurers. Certainly, much has transpired in the last two years to return stability to the markets. This summer saw the sweeping Dodd-Frank financial reform bill signed to law, new international banking standards adopted under the Basel III Accord and a variety of European programs designed to stabilize the Euro Zone.

So, on this second anniversary of the Lehman bankruptcy, we wanted to look back and assess what has been accomplished to date and how the credit and risk landscape has been transformed by these events.

First, the huge compression in credit spreads over the past two years is evidence that the credit markets have healed and returned to a relatively stable functioning level. Many financial institutions weakened by the crisis have addressed their problems through equity infusions or mergers, leaving Treasurers in the familiar territory of choosing credit exposures amidst the usual uncertainties of a tepid recovery. Credit profiles of individual securities, sectors and asset classes have improved as their underlying fundamentals have been altered by the new regulatory framework. These changes have affected the liquidity, credit strength and supply of marketable debt securities. And, while some regulatory changes are immediate in their effect, oversight agencies have also been given broad powers to modify regulation as needed.

Private sector leverage has shifted to Government debt weakening certain sovereign balance sheets and spurring belt tightening for the sovereigns at a time when governments are looking for ways to stimulate demand. Continued deleveraging in the consumer and corporate world combined with strained government balance sheets portends an anemic recovery, but a recovery none the less.

Because the Dodd-Frank bill broadens the authority of regulators to establish new regulations, we view this legislation as the beginning and not the end, of a long process aimed at preventing destabilizing events in the future. Additionally, the Basel III Accord’s phase-in period ranges out to 2019, which, while ultimately helpful to banks, limits the near term impact of the accord. However, it should be noted that the vast majority of large U.S. banks already meet the stated Basel III requirements.

Finally, given the rapid development of the regulatory back drop, we believe it is important to understand some of the nuances of this improving landscape and to regulate one’s risk appetite accordingly. Therefore, in this month’s Research Spotlight we’ll be examining the impact of the new financial reforms on institutional cash investments and how treasurers should make decisions with these regulations in mind.

Best Regards,

Ben Campbell
President & CEO