Center for American Progress

NEW REPORT: Managing Financial Risks as Markets Move
Press Release

NEW REPORT: Managing Financial Risks as Markets Move

Asset-based Reserve Requirements for All Lenders Would Protect the U.S. Economy from Volatile Swings in Asset Prices

Read the full report (PDF)

Washington, D.C. – The recent nausea-inducing ups and downs of the stock market is widely acknowledged to be a direct cause of the collapse of the housing market and a crisis in our lending institutions.  The question before us is: Now What? 

Today the Center for American Progress released “Managing Financial Risks as Markets Move” by Christian Weller and Kate Sabatini, a new and particularly timely report which proposes to address the boom and bust financial markets head on with a new regulatory tool: asset-based reserve requirements, or ABRRs.  The tool may seem radical to some but deserves, in our view, serious consideration against the backdrop of apparently increasing systemic financial market risks.

Specifically, ABRRs would require all lending institutions that originate new loans to place with the Federal Reserve a specified percentage of loans as low- or no-interest-bearing reserves. The share of loans to be held with the Federal Reserve would be larger for riskier loans and could be adjusted according to economic needs. For instance, when the economy slows down, regulators could reduce the share of a loan required to be held in reserves to increase the amount of credit available. 

Several aspects of today’s financial markets and concomitant regulatory regimes support the introduction of ABRRs. Specifically: 

  • The Federal Reserve needs new tools to fulfill its regulatory and monetary duties.
  • ABRRs would complement existing capital requirements.
  • There are established procedures to assess risk.  
  • The Federal Reserve can process reserve requirements in a complex, fast-paced world.
  • Policymakers need to consider complementary policies to equalize credit access. 

Given the sweep of financial liberalization in the United States over the past three decades—and the accompanying rise in volatility across a number of asset marketplaces—the time for ABRRs may have arrived, although the concept itself has been around for some time.  

This new report is designed to spark a discussion over whether the country needs new regulatory tools to handle more complex and larger financial markets—and, if so, what those new tools should look like, using ABRRs as a possible example. 

Read the full report (PDF)

###