Bank Reform May Ease Fiscal Volatility

NEW YORK CITY-The financial regulatory reforms signed into law by President Obama earlier this week are intended to accomplish a number of things. But one potential effect that probably wasn’t designed into the legislation is a leveling-off of the economic rollercoaster ride the city’s economy has taken as the financial services sector’s fortunes have risen and fallen in recent years, says a report from Eastern Consolidated.

“New York City’s dependence on Wall Street for its tax base has grown substantially over the last two decades as profits have soared, but Wall Street is also largely responsible for the heavy volatility in New York’s economy,” the firm’s chief economist, Barbara Byrne Denham, writes in the report.

Financial services in recent years has generated more payroll taxes in the city than any other in recent years, so it stands to reason that the sector accounted for more than two-thirds of the $2.9-billion decline in payroll taxes here in 2009. The newly enacted Dodd-Frank bill could lessen that volatility, “which should rein in profits for Wall Street firms in the short term but should stabilize revenues in the long run,” Denham writes.

A June employment bulletin that Eastern Consolidated put out last week notes that the securities industry shed 1,000 jobs during the month, and topped the list of year-to-date job losses in the city. Uncertainty over the pending regulatory reform put a freeze on Wall Street hiring, the firm says.

Now that the reform bill is a fait accompli, “the uncertainty on hiring could change anytime,” Denham tells GlobeSt.com. “Now that the legislation was signed, there is less uncertainty, which is good for the economy.”

However, she adds, “The real rules will be left to the regulatory agencies to implement, which will take a few years. And how the regulators define ‘proprietary’ will determine how traders can trade for in-house funds.”

Across the board, Denham writes in the Wall Street report, the regulatory agencies will have the responsibility of fine-tuning the Dodd-Frank bill’s provisions, “which means that lobbyists will still have the opportunity to exert their influence in the final language. This means that loopholes are likely to remain in the regulations and Wall Street will evade the worst of the harshest reforms. The bounce in financial stocks since June 25 when the legislation was ‘finalized’ reinforces the sentiment that Wall Street can breathe a sigh of relief.”

Denham tells GlobeSt.com she doesn’t see Wall Street adding a significant number of jobs in the near term, “but I think any future losses of jobs should be minimal.” Similarly, she believes the space givebacks by major financial services firms Downtown have “probably topped out, but I don’t see a major turnaround in leasing anytime soon.”

When Denham finalized the Eastern Consolidated report, titled “Wall Street Volatility and Its Impact On New York City’s Economy,” enactment of the Dodd-Frank bill was still in the future. Asked whether the final legislation differed from earlier perceptions that it would go fairly easy on the industry, Denham says, “There were no major surprises in the legislation except that they watered down the ‘Volcker rule,’ especially on the part of Wall Street firms owning hedge funds. Many were relieved that firms could own a higher share of these funds than had originally been presented.”

She adds that a provision introduced by Sen. Blanche Lincoln (D-AR) that would have forced banks to spin off their derivatives business “was also cast aside."