Financial Market Reforms Offer More Stability, but Less Credit

The Administration has proposed a number of financial regulatory reform initiatives. Policy survey participants were asked to determine whether these initiatives would result in improved financial stability, benefit consumers or nonfinancial firms, benefit financial firms, and result in a reduction in the supply of credit.

A majority of the respondents indicate that many of these financial regulatory reforms are likely to result in improved financial stability. This is particularly true for enhanced regulation of derivatives, greater requirements for “skin in the game” for securitized mortgages, and reform of the credit rating agencies. However, creation of a Consumer Financial Protection Agency (CFPA) is not expected by many respondents to lead to improved financial stability.

Although the creation of a CFPA and the imposition of “plain vanilla” product standards are both viewed as beneficial for consumers and non-financial firms, the other regulatory proposals are also viewed as quite beneficial for consumers. Perhaps surprisingly, 84 percent of respondents indicate that rating-agency reform would benefit consumers and non-financial firms, the highest positive response across proposals for this category. (Whether this positive response is intended to apply more to non-financial firms than consumers can only be conjectured.) Across the various reform proposals, respondents tend to see a trade-off between perceived benefits or costs for consumers or non-financial firms on the one hand and benefits or costs for financial firms on the other. For example, while 69 percent of respondents indicate that the creation of a CFPA could benefit consumers, only 14 percent of respondents think that creation of such an agency would benefit financial firms.

For three of the proposals—the creation of a CFPA, “skin in the game” requirements, and creation of a systemic risk regulator—a majority of respondents indicate that a result would be a reduction in the supply of credit to the economy. Some 49 percent indicate that enhanced regulation of derivatives would also curb the supply of credit. As the chart above illustrates, respondents believe that two proposals could have significant benefits across the board with little cost in terms of reducing the supply of credit—the consolidation of banking regulators and rating- agency reform. These survey results suggest that the particular mix of measures ultimately adopted as financial reform could have very different implications for financial stability, credit availability, and consumer well-being.

Financial Reform

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