Beware of Bank Regulations Curtailing Credit

Beware of Bank Regulations Curtailing Credit

As Diana Furchtgott-Roth of the Manhattan Institute points out, there is widespread hostility towards the financial sector even though:

  • 140 banks failed in 2009
  • regulators and Congress encouraged banks to make high-risk loans
  • many banks were required by Hank Paulson to take the TARP money in 2008
  • all but one large bank repaid TARP funds with interest

In order to regulate banks, President Obama is adopting both the Volcker Rule and the Financial Crisis Responsibility Fee. However, the consequences of having both regulations simultaneously interfering with the financial industry are highly uncertain.

Jason Zweig believes that the Volcker rule would distort banks’ behavior. But Diana Furchtgott-Roth argues that it “would restrict banks to core customer-based activity, strengthening the banking system.”

Obama’s proposed bank fee, which is actually a tax, could discourage intra-bank lending, hinder the banking system, and reduce the supply of credit available to customers. The likely effects of the after-TARP fee may undermine Obama’s plan to expand lending programs for small businesses.

Will the after-TARP tax along with the Volcker Rule effectively stabilize the banking system? It doesn’t seem likely. Reform is necessary, but the recovery will not be advanced by taxing institutions that play a key role in generating economic growth.

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