True prosperity — good jobs, rising incomes, and financially secure households — is built on a foundation of strong economic growth. Strong growth is only possible when financial regulations are well-reasoned and properly tailored, ensuring our financial markets are not only stable but also diverse, liquid, and accessible.
Many of the reforms implemented in the wake of the 2008 financial crisis were narrowly focused on financial stability and did not consider the impact on economic growth. The unintended consequences of these initiatives have made it difficult for Main Street businesses to access the financing they need to get started, sustain operations, manage cash, make payroll, and create well-paying jobs. For example, arbitrary regulatory thresholds have imposed strict rules on small, midsize, and regional banks, making it harder for them to serve their communities. The Volcker Rule has made it more expensive for corporate treasurers to access the debt and equity markets. Capital and liquidity rules have restricted lending and disincentivized traditional means of cash management.
With eight years of experience and empirical data, we are in a position to fully understand the impact of the post-crisis reforms and ensure that they are properly calibrated to balance stability and growth. We’ve learned that more is not always better; it’s time to get financial regulation right.
The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) is particularly concerned by the state of small business lending. Data from U.S. Chamber surveys of small businesses, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve show significant declines in small business lending over the last decade despite widespread demand.
- Across all FDIC-insured banks, the number of small business loans declined 13% between 2008 and 2017
- Small business loans reported under the Community Reinvestment Act declined 43.5% between 2008 and 2015
- The Federal Reserve Banks’ 2016 survey of small business access to credit found serious shortfalls in small business financing despite widespread demand:
- 60% of small business applicants received less than the amount for which they applied.
- 24% of applicants were unable to obtain any financing at all.
- 25% of small businesses that did not apply for financing reported they were either too discouraged or the cost of credit was too high.
- U.S. Chamber surveys have found that small businesses depend on bank financing and that financial regulation directly impacts Main Street:
- 51% of small business executives consider banks to be their ideal credit providers, and 40% plan on applying for a loan or line of credit over the next year.
- Only 31% of small businesses believe credit conditions are improving.
- Corporate treasurers cited the Basel III capital and liquidity rules as having the most negative impact on their companies, among all the post-crisis reforms.
- The decline in small business lending has serious impacts. According to the U.S. Census Bureau, only 414,000 small businesses were founded in 2015, a decline of 26% since 2006.
Several factors have contributed to the steep decline in small business lending. The Dodd-Frank Act’s embrace of standardization in the banking industry has undermined relationship lending — credit decisions informed by local knowledge and judgment. Dramatically higher compliance costs have made it more cost-effective for a bank to make one large loan rather than several smaller ones. Strict capital and liquidity standards and the stress-testing regime have penalized loans to small businesses.
The decline in small business lending represent startups that were never launched, jobs that were never created, and expansions that were never completed. To balance growth and financial stability, the CCMC strongly supports replacing a one-size-fits-all approach with tailored bank regulation — sophisticated rules that are properly calibrated to the risk profile of an activity or institution. Tailoring is essential to effectuate a core principle of good government: regulations should impose the least burden necessary on society.
The CCMC is issuing the following recommendations to restore Main Street lending:
- Replace Asset Thresholds With Multifactor Risk Assessments
- Reduce the Burden of Stress Testing and Capital Planning While Preserving Benefits
- Harmonize U.S. Capital and Liquidity Rules with International Standards
- Reassess the Volcker Rule
- Improve the Regulatory Process