Beyond the nuts and bolts of the new Federal Reserve directive, the rules would affect Main Street consumers in three possible ways:
- Fewer loans: Keeping more capital on hand could mean less money to lend out to borrowers. This isn’t guaranteed – banks can still lend as much money as their risk models deem feasible – but having to keep more cash on hand could trigger even further caution among big banks, which have already cut way back on things like small business loans, mortgages and auto loans.
- “Collapse” protection: The new rules could protect consumers against another economic crash – a big part of what the Fed is addressing with its new rules is credit exposure. That means the Fed is getting ahead of the curve on a big problem that occurred in 2008 – one that fueled the Great Recession. There, banks entered into huge credit deals with other big banks and large corporations. When those credit deals begin to unravel, some banks were left without the all-important cash cushion needed to bulwark banks in times of crisis. Now, the Fed is keeping a close eye on credit exposure, and can act before a massive bank failure, thus adding another layer of protection against a big economic collapse.
- Possible economic slowdown. Expect large banks to argue that putting financial institutions into a tighter straightjacket could further tighten the nation’s credit market, and further slow economic growth. Their larger point is that the more the federal government intervenes, the less freedom big banks will have to provide loans to individuals and businesses.
The Fed’s directive is brand new and will need to play out more fully before the real impact can be measured. But for now, Uncle Sam wants a greater say in how banks operate, with tighter financial limits in mind.
Banks may not like the hand they’ve been dealt, but considering the recent outrage at some of their practices, they have less and less to say in the matter.
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