As the difference between the two grows (which would be attributable to amounts extracted by intermediaries as compensation for essential intermediation), the costs of borrowing for the purposes of creating productive projects become higher than they should be, with arguably negative reputational consequences. Given these particular reputational dimensions associated with financial institutions, might financial regulators have an interest in considering reputational harms analytically?
Could there be benefits to understanding the ways that an individual financial institution’s reputation – or that of the financial industry as a whole – might have particular effects on, for example, safety and soundness, financial inclusion, or financial innovation?