At a meeting with small-business leaders last week, President Donald Trump pledged to do “a big number” on the 2010 Dodd-Frank Act, which he blamed for cutting off the bank lending needed for growth. “It’s almost impossible now to start a small business and it’s virtually impossible to expand your existing business,” he said.
Trump is wrong about small-business starts. Since early 2010, new business creation has rebounded.
But he’s right, albeit with a whiff of exaggeration, that it’s harder to finance and expand a small business than it needs to be. Total bank lending to small businesses has declined by about 6 percent since Dodd-Frank was put in place. Although weak consumer demand is a major culprit, misdirected regulation has also created formidable obstacles.
Half a decade into Dodd-Frank’s life, it’s clear that the rules aimed at large, complex institutions have fallen hard on banks with less than $10 billion in assets -- a group that accounts for about two-thirds of all small-business lending. These banks must sort their assets into myriad risk categories, a task that has helped double the length of the quarterly reports they file with supervisors. Stringent one-size-fits-all guidelines limit their ability to make mortgage loans -- a major source of financing for entrepreneurs.
Such requirements are entirely unnecessary for institutions that don’t get involved in derivatives, keep most of their loans on their own books, and run simple businesses that examiners understand well. Worse, the added red tape complicates precisely the kind of know-your-customer lending at which they excel. That’s why some banking experts -- including Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp. -- have proposed freeing them of the most onerous requirements as long as they maintain adequate levels of loss-absorbing capital.
Financial regulators have actually taken a step in the right direction, issuing a rule that will streamline quarterly reporting requirements for the smallest banks (with assets of less than $1 billion). Still, there’s plenty more that the Trump administration and Congress can do, such as liberating well-capitalized community banks from risk-weighting requirements and certain mortgage-lending constraints.
Dodd-Frank was built primarily to address the excesses of sprawling, global institutions, not small-town banks that take risks on people they know. It’s a disconnect that should be recognized -- and repaired.
