Proposed Financial Reforms — What They Could Mean for Interest Rates and You

Treasury Secretary Timothy Geithner and National Economic Council Chairman Lawrence Summers recently outlined a proposal for financial reforms the Obama administration hopes to enact. At the center of the proposal are higher capital and liquidity requirements for banks, and more comprehensive oversight for complex financial institutions.

Fair enough — but what does this mean to you?

As a bank depositor, these proposals could affect you in two ways, both of them good. Naturally, the grand design of this type of program is to make banks safer and more stable. While you may currently have FDIC insurance to fall bank on, it’s much better never to have things get to that point. So, if the reforms are effective, you could rest a little more easily about your money market or savings accounts and your certificates of deposit.

A second, less obvious impact could be to push interest rates higher. Requiring banks to maintain more capital reserves and liquidity would put a premium on deposits and make lending tighter. Interest rates are affected by the supply and demand for capital, and these proposals would restrict the supply and create more demand. Eventually, this could result in higher interest rates for savings accounts and other deposits.

Two cautions though. First, these proposals are still a long way from becoming reality. Second, there was no shortage of financial regulation in place previously; ultimately, what matters is effective enforcement.