Page 28 - FINAL CFA II SLIDES JUNE 2019 DAY 4
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LOS 13.h: Describe benefits and costs of regulation. READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE
MODULE 12.3: GROWTH AND CONVERGENCE THEORIES
The cost of regulation is not limited to the implementation cost (i.e., the cost of operating a government agency to provide monitoring and
supervision); an analyst should also consider the cost of the regulation to the private sector.
Regulatory burden (also known as government burden) refers to the cost of compliance for the regulated entity. Regulatory burden minus the private
benefits of regulation is known as the net regulatory burden.
Regulators should be aware of unintended consequences of regulations.
Regulatory costs are difficult to assess before a regulation is put in place. For this reason, many regulatory provisions include a ‘sunset clause’ that requires
regulators to revisit the cost-benefit analysis based on actual outcomes before renewing the regulation.
LOS 13.i: Evaluate how a specific regulation affects an industry, company, or security.
Regulations may shrink the size of one industry (e.g., if it is heavily taxed) while increasing the size of another (e.g., an industry receiving subsidies).
Analysts should review the impact of current and proposed regulations on an industry or company, as regulation can have a large impact on valuation.
Regulations may introduce inefficiencies in the market. For example, past government bailout of financial institutions has conveyed a message of future
implicit guarantees. For this reason, the credit spreads on bonds issued by the financial sector may not fully reflect their risk.
Some regulations may be specifically applicable to certain sectors while others may have broad implications affecting a number of sectors. Certain industries
have more exposure to certain types of regulations. For example, environmental laws have higher implications for mining, oil, and gas sectors. Similarly,
labor laws are more relevant for labor intensive industries.
