Lew Confronted Over Volcker Rule Effect on Bond Liquidity

The head of the U.S. House Financial Services Committee is calling on Treasury Secretary Jacob J. Lew to make sure that new regulation doesn’t inhibit corporate bond liquidity.

Representative Jeb Hensarling, a Republican from Texas, asked Lew to ensure implementation of the Volcker Rule doesn’t reduce trading of company bonds, according to a letter sent this week, the Financial Times reported earlier today. The rule restricts banks from making certain types of bets with their own money.

Reduced liquidity could lead to higher borrowing costs for companies and slower economic growth, according to the letter, dated July 8. The biggest Wall Street banks have curbed the amount of bonds they hold since the credit crisis. Dealers cut their holdings of the securities by 76 percent from a record high in October 2007 to $56 billion in March 2013, when the Federal Reserve changed the way it reported the data.

“A lack of liquidity in the corporate bond market makes it more expensive for businesses to grow and create jobs, and could therefore have profound consequences for the U.S. economy,” Hensarling said in the letter.

Lew testified before Congress last month that it was too early to tell of the rule’s effects since it hasn’t been fully implemented by the market.

“The rule protects economically important activities, like market making, that are essential for financial market liquidity,” Suzanne Elio, a Treasury spokeswoman for domestic finance, wrote in an e-mail today. “Banks began reducing their bond inventories long before the Volcker Rule or any other part of regulatory reform took effect.”

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