Photo: US Navy
Goldman Sachs is arguing against a proposed Fed Rule by picking on probably the most sensitive topic in the American economy today: jobs.The rule in question is a requirement that banks limit single counterparty exposures to 25% of their regulatory capital, and is being mandated as part of the Dodd-Frank reforms.
The Fed, however, is taking it a step further and wants banks with over $500 billion in assets to limit exposures to each other to only 10% of regulatory capital, in order to prevent a domino-effect collapse of multiple banks should just one fail, according to the FT.
Banks, naturally, say it’s unreasonable and that the Fed’s models for calculating exposure magnify the numbers without reason. It’s also been reported that the CEOs of the largest banks in the US spent a meeting at the New York Fed yesterday arguing against this rule too.
But in a particular stern letter to the Fed Monday, Goldman Sachs laid out the true doom and gloom scenario, as Mark Gongloff at the Huffington Post noted. In the letter, Goldman traces the effect that limiting a bank’s exposure to each other would have all way through to the heart of the American economy: jobs—
The Proposed Rules could have wide- ranging negative economic consequences. They are likely to damage market liquidity, generating lower returns for investors and driving higher funding costs for corporate debt issuers, as well as higher transaction costs for activities like hedging interest rate and foreign exchange exposures. This is likely to harm U.S. economic growth and international competitiveness. We estimate that the liquidity impact to the corporate bond market alone would reduce real GDP growth in the U.S. by 15 to 40 basis points over a year. This, in turn, could raise the unemployment rate by 10 to 20 basis points eliminating 150,000 to 300,000 U.S. jobs. Given the current economic environment, it is unclear what the [Federal Reserve Board] could do to offset these impacts through monetary policy.
It seems like Goldman’s message is essentially: stop trying to regulate us more, because if you do jobs will be axed and no amount of QE will be able to help you then.
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