The U.S. Securities and Exchange Commission released a report Aug. 8 claiming that Dodd-Frank regulations, including the much-debated Volcker rule, did not damage capital and market liquidity. The report added that conditions in some cases actually improved since post-crisis regulatory reforms.
Congress commissioned the 315-page report as part of a specific review of the Dodd-Frank financial regulatory framework, in addition to other regulations such as Basel III, which Congress designed the report to guide considerations for the appropriations process, which authorizes government spending.
On capital formation, the SEC noted that about $20.20 trillion in capital was formed from the signing of Dodd-Frank in 2010 until 2016. The SEC found that capital formation was not lower after financial regulatory reform, and that primary market security issuance may have been higher around the implementation of the JOBS Act, a 2012 bill that loosened some restrictions on capital access for small businesses. More specifically, the SEC saw an increase in the number of small company initial public offerings.
In the private market, the report said debt and equity issuance increased "substantially" from $1.16 trillion in 2009 to $1.87 trillion in 2015.
The SEC also addressed concerns about market liquidity, which Republicans have highlighted following a Federal Reserve paper exploring the possible damage of the Volcker rule, which restricts proprietary trading, to corporate bond markets.
The report says that trading activity and average transaction costs have generally "improved or remained flat," with transaction costs actually decreasing for smaller trade sizes relative to the precrisis period. The SEC notes, however, that dealers in corporate bond markets have broadly reduced their capital commitment since 2007, although there has not been a "commensurate decrease" in the number of dealers participating in the market.
In the U.S. Treasury market, the SEC found "no support" for a link between the Volcker rule and market liquidity conditions, since U.S. cash Treasurys are exempt from the rule.
"Overall, it is not clear that corporate bond market liquidity has deteriorated following the enactment of the Dodd-Frank Act," the report reads.
The SEC's Division of Economic and Risk Analysis, which wrote the report, cautioned that it is difficult to evaluate the causal relationship of Dodd-Frank to capital and market liquidity, due to factors like macroeconomic conditions and market participant behavior. Unlike the U.S. Treasury report released in June, the SEC report does not include specific policy recommendations.