Proposed regulation to prohibit proprietary trading by banks, known as Volcker Rule, could result in higher energy prices and fewer jobs, according to a new study.
The study, which was conducted by information and analytics provider IHS, examines the impact the implementation of the Volcker Rule would have on the energy industry, which heavily relies on banks for commodity risk management and intermediation services.
“The findings indicate that the regulations, as currently envisioned, could create a significant ripple effect through the energy economy that would reduce production, increase the cost of electricity and gasoline and ultimately affect jobs,” says the study.
The report was commissioned by Morgan Stanley , one of the big banks lobbying to ease the regulation. But IHS maintains its analysis, content and conclusions are entirely independent.
According to IHS , the proposed regulation, while important for quality and safety of financial markets, lays down too narrow an interpretation of market-making and hedging.
“If the role and permissible activities of market makers are too narrowly defined, the risk of curtailing important services offered by the banking sector will increase. Customers who need these risk management services may find that their cost has increased, or that these services are no longer available,” says the report.
Moreover, energy consuming industries — such as trucking companies, airlines, railroads and barge operators — could see increased costs and price volatility if the availability of risk management tools is reduced. That could also lead to greater earnings volatility, notes the report.
The report warns that “the absence of the ability to manage price risks and earnings volatility could increase the pressure to pass risk along to the consumer through fuel surcharges and other methods.”
IHS analysts also found that natural gas resource development could be hurt and additional refining capacity could close. As a result, East Coast gasoline prices may rise by 4 cents per gallon or $2 billion a year, and electric power costs could increase by $5.3 billion.
In addition, the economic impact on the energy segments could result in up to 200,000 fewer jobs and $34 billion (2005 dollars) lower GDP on an annual basis between 2012 and 2016. Cumulative nominal federal tax receipts over the same period would be $12 billion lower.
The report suggests “to carefully reconsider the definition of 'market maker' in the Volcker Rule’s 'permitted activities,' as it relates to commodity markets.”
However, Americans for Financial Reform, an advocacy coalition supporting the legislation, took issue with the report. “This is just the latest in a series of industry-funded studies ordered up by financial market interests expressly to undermine the Volcker Rule,” executive director Lisa Donner told CNBC in response to a question. “They don’t want to have to stop the profitable and risky proprietary trading that the Volcker rule bans, and they are grasping at straws to protect the status quo.”
But Kurt Barrow, one of the IHS study's principle authors, says: “We stand behind the conclusions, as we do with all of our work.”
The controversial rule is currently slated for implementation on July 21, but Federal Reserve Chairman Ben Bernanke has acknowledged that the rule is unlikely to be finished by the deadline.
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