From financial turmoil to regulatory turmoil.

• Author: Carfang, Anthony J.

Governments around the world, largely reactive during the financial crisis, are now taking a proactive approach to devise new and sweeping regulation.

This regulatory activity will have a direct impact on how many companies conduct business. Although the "reforms" are targeting financial institutions, other firms will feel the downstream impact throughout the value chain. Thus, treasurers must resist the temptation to view pending regulation as a problem only impacting financial firms.

Analysis of "reform" recommendations from the United States, United Kingdom and European Union reveals several common themes, including:

* Reduce activity in unregulated money markets;

* Increase capital requirements;

* Increase detail and frequency of reporting;

* Create committees to oversee all of the above; and

* Create governing bodies to oversee global activity.

As a result of these likely changes, expect to see a sharp reduction in money market activity and further concentration in commercial banking.

In the 1960s, banks held roughly 90 percent of corporate short-term debt. In 2007, that figure dropped to about 20 percent, largely due to the wide array of available money-market instruments.

Now, with a likely clamp down on large segments of the nonbank money market (such as derivatives, hedge funds, etc.), commercial banks' market share of short-term debt will likely increase. That means less banking competition for business. Costs of financial services will also likely rise, due to decreased banking competition and increased bank operating and capital costs.

The impact on business will be higher costs of capital and fewer financial-services options. New regulation will cause higher costs of financial services in the credit and noncredit markets as well. Regulated firms will need to make up these compliance costs and will likely increase customer fees. The restricted money market mutual fund (MMF) sector will be less attractive as a direct result of proposed regulations.

Among "reforms" that will have adverse consequences for corporations:

* The Obama administration's framework classifies large, integral financial institutions as Tier 1. These banks will literally become "too big to fail." Because they are essentially government-backed entities, customers will be driven to Tier 1 banks and ultimately eliminate the free market checks and balances system that exists today.

* A proposal to require MMFs to float daily net asset values, greatly diminishing...