Shortly after taking office in January, President Trump signed an executive order cutting financial regulations, a first step at dismantling aspects of the Dodd-Frank Act. But what is Dodd-Frank? Is it hurting small business? Will dismantling it make a difference?
In 2010, after the 2008 financial crisis, President Barack Obama enacted the Dodd-Frank Act, a compilation of banking regulations intended to promote the safety and stability of the U.S. financial system. The Dodd-Frank Act, named after Democratic leaders, Senator Chris Dodd and Representative Barney Frank, created a series of new regulatory agencies, such as the Consumer Financial Protection Bureau (CFPB), and the Financial Stability Oversight Council (FSOC), to protect consumers against risky business practices and monitor large companies whose failure could have a major negative impact on the U.S. economy.
Critics of Dodd-Frank say that it's hurting Main Street. Small community banks, which are a primary source of small business loans, are subject to the same high reserve requirements designed for large lending institutions. They are now required to hold a much higher percentage of their assets in cash than they were prior to the financial crisis, limiting their ability to lend to startups and small businesses. Supporters of this argument point to a Harvard research study on the plight of community banks and how, since 2010 - around the time Dodd-Frank was passed - their loss of market share has almost doubled. Likewise, they believe these new regulations, which were meant to protect the 'little guy' against Wall Street's risky banking practices, actually do the opposite; they hinder access to capital, which is essential to starting and growing businesses that provide jobs and fuel the economy.
Yet, those in support of the Dodd-Frank feel the provisions it put in place have been successful. Before the financial crisis, the overall U.S. financial sector was highly leveraged and undercapitalized and banks did not have enough equity capital to cover their losses, resulting in bankruptcies and government bail-outs. Dodd-Frank has since revamped the financial system, with increased capital requirements and other banking standards. In the mortgage market, financial reform has protected consumers from predatory lending and other financial wrongdoing. And, in the credit card market, the Credit Card Act of 2009 was enacted to protect against abusive credit card practices.
Moreover, since its passage, the U.S. economy has steadily recovered, and many banks are lending again to small businesses. While lending initially bottomed out after the 2008 financial crisis, it has since nearly doubled, giving consumers more options than ever. According the Federal Reserve, commercial and industrial loans have reached a record high of $2.1 trillion. The cost of credit has also decreased, with the average interest rate on credit cards at the end of 2016 being only 12.4 percent, down from 14.2 percent in 2010, and personal loan rates falling over 1 percent during the same period. A recent report by BizBuySell, indicated that a record number of small businesses were bought and sold in 2016, attributing this in part to more financial options being available on the market.
There are many opinions and discussions around the Dodd-Frank Act and its impact on small business. Going forward, one can only speculate how President Trump plans to either repeal or reform certain aspects of it. The latter is more likely, as the Dodd-Frank Act is complex and many of its provisions have already been adopted; financial institutions have spent hundreds of millions of dollars putting its regulations in place and reorganizing their business lines. Hence, reforming certain banking regulations would make sense, but an outright repeal might simply not be practical.
Many agree that measures should be taken to ease the Dodd-Frank burden on community banks. In a February, 2017 interview on CNN, co-author and former Rep. Barney Frank admitted that Dodd-Frank isn't perfect. He agreed that it has unfairly hurt some smaller banks by burdening them with compliance costs they can't afford. He also felt it would be reasonable to exclude smaller banks with less than $100 to $125 billion in assets from the Volcker Rule, which prevents banks with over $50 billion assets from making risky bets with their own money.
For the time being, Dodd-Frank remains a hotly debated topic - too much rules and regulation for some, and for others, a much needed safeguard against risky banking practices.