Regulatory Reform Likely to Restrict Lending
The article discusses new proposed legislation designed to make changes to the country's financial system with the ultimate goal of protecting consumers and investors. One element of the bill requires banks to preserve a certain level of capital to offset losses from failed loans. Ms. Booth indicates that while this legislation is constructed to give stability and credibility to the financial system, it will also limit the amount of capital available for new commercial loans.
The proposed bill would also give the Federal Reserve Bank the authority to prevent financial institutions from growing so large that their failure puts the entire financial system at risk. Such restrictions could result in making large banks less competitive than smaller financial institutions and private equity funds. "If they have additional requirements they have to satisfy, they won't be able to compete on the same level," Ms. Booth said.
The legislation will also target securitized investments such as commercial mortgage-backed securities (CMBS), which are bonds backed by commercial mortgages. The proposed changes would require the originators of CMBS to hold 5 percent of the loan's risk on their balance sheets, which Ms. Booth predicts will increase the confidence of investors. "There are funds and individuals interested in CMBS," she said. "The legislation has the potential to increase the confidence in that, but it's more of a medium-term impact than a short-term impact."