Financial Reform Will Cause Credit Crunch: Sen. Gregg

The US will face a severe credit crunch if the financial regulation bill passes in its current form, Sen. Judd Gregg (R-NH) told CNBC Thursday.

"This bill as it's presently written is going to create a massive contraction in credit, I believe, in the financial markets and on Main Street over the next year to year and a half as people try to adjust to the new standards that are put in this bill," said Gregg.

Gregg, who is a member of House-Senate conference committee hammering out the final version of the bill, said the derivative language in the bill is one of the main reasons there could be a major credit squeeze.

The bill, which is in its final hours of revision, would require banks to spin off their swap desks requiring large amounts of new capital to support the desks. That capital, instead of being available for lending, will be tied up in the swap desks causing a contraction in credit, Gregg said.

"Derivatives, as we all understand, are the oil and grease that keeps the credit markets going," he said. "If you put so many obligations on them that are arbitrary, which really dont get to the core issue of making them safe and sound and making them as transparent as possible... you're going to, in my opinion, do very little that is constructive and a lot of that's destructive in the area of credit formation in this country."