Texas laws that prohibit underwriters from pursuing policies that discriminate against the petroleum and gun industries may result in municipalities facing higher borrowing costs due to less competition between subscribers.
That’s according to a new paper that was dissected at the Brookings Institution’s 11th Annual Municipal Finance Conference on Monday. Its authors Daniel Garrett, associate professor of finance at the Wharton School of the University of Pennsylvania and Ivan Ivanov, an economist at the Federal Reserve, presented their findings.
“If we focus on the really most exposed borrowers, we say that municipalities with more than half of your previous obligations underwritten by these banks, that you have an increase of almost 40 basis points in your borrowing costs “, said Garrett. “It’s economically huge.”
Texas accounts for one-eighth of the entire municipal market and issues approximately $50 billion in municipal bonds each year.
The authors estimate that municipal borrowers across the state will typically have to pay $300 million more than they would have had the state not instituted these restrictions.
Banks such as JP Morgan, Citigroup and Bank of America have instituted policies prohibiting their own involvement in transactions related to the sale of firearms. This has resulted in increased underwriting costs for municipalities in Texas, as the the subscriber base is shrinking.
“The Texas law highlights how governments can respond to ESG policies and attempt to punish banks,” Garrett said. “Banks exit the market and affected governments incur higher borrowing costs and reduced access to external finance.”
It also showed that issuers who previously depended on underwriters who exited the market are much more likely to negotiate prices than to hold an auction.
There could potentially be new entrants to the Texas underwriting market, but that probably won’t have much of an effect on lowering borrowing costs to what they once were, Garrett said.
The study analyzes 8 months of borrowing activity, but during this period alone, the increase in interest payments for borrowers increased between $303 and $532 million.
“Economies around the world that attempt to undo ESG policies through the financial sector risk adverse consequences when some banks exit the markets,” Garrett said.