A Boost for Small Businesses
- Dodd-Frank required more than 10 federal agencies to write more than 400 new rules, imposing 27,000 mandates on financial institutions of every size.
- Dodd-Frank’s rules imposed at least $36 billion in new costs, much of which fall on smaller banks and credit unions that pose little risk to the economy.
- S. 2155 will allow smaller banks and credit unions to invest more in families and businesses in their communities by freeing them from needless compliance costs.
The Senate is expected to consider this week S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, a bipartisan bill that scales back some of the worst excesses of Dodd-Frank while maintaining key consumer safeguards. This important legislation helps credit unions, community banks, midsized banks, and regional banks serve local businesses and families by cutting burdensome regulations that make it harder for these institutions to provide financial services. As a Wall Street Journal editorial noted on March 6, 2018, the bill mainly “eases administrative burdens on 5,000 some community banks that make up about 98% of financial institutions but only 15% of assets.”
Small Banks Are Disappearing from Towns at an Alarming Rate
Unnecessary Regulations Hurt Small Businesses
The Dodd-Frank Act was enacted in 2010 following the financial crisis in an attempt to reduce systemic risks the financial sector posed to the economy. The wide-ranging legislation touched nearly every aspect of the financial system, including banks and credit unions that pose little risk to the economy. At almost 850 pages long, it required more than 10 regulators to write almost 400 new rules. The Mercatus Center found that, as of 2016, Dodd-Frank had already added more than 27,000 new federal dictates on American businesses. The American Action Forum has estimated that Dodd-Frank rules have imposed more than $36 billion in costs and 73 million paperwork hours. Agencies are still writing Dodd-Frank regulations eight years after the law was enacted.
The costs have hit smaller banks and credit unions especially hard. Loans by community and regional banks and credit unions are a significant driver of economic growth. These financial institutions provide a crucial source of credit for families and small businesses, especially in rural and underserved areas. Because of their small size, these banks and credit unions can have a harder time complying with excessively complex reporting and paperwork requirements. Compliance costs have hastened bank closures in small towns, leading to a growing number of places with no bank branches.
Money the banks spend complying with needless regulations is money that can’t be used to support their communities. A June 2017 report by the Department of the Treasury warned that the regulatory impacts of Dodd-Frank have reduced economic growth below its potential. The report found that these burdensome regulations “have undermined the ability of banks to deliver attractively priced credit in sufficient quantity to meet the needs of the economy.”
Important Steps to Unleash Capital
S. 2155 allows small, midsize, and regional banks and credit unions to use more of their capital to make loans to families and businesses and protects consumers and the stability and soundness of the financial system. The bill contains a number of provisions recommended by the Treasury Department, including one that simplifies complex risk-based capital requirements for community banks in excellent financial shape and one that exempts smaller banks from the complicated Volcker rule governing their investments.
The legislation directs regulators to update reporting requirements for banks with less than $5 billion in total assets and raises the threshold for more frequent examinations. It modernizes Dodd-Frank by ensuring that enhanced prudential standards apply only to the largest and most systemically important financial institutions, while giving regulators flexibility to address any risks to financial stability.
It also makes it easier for small lenders to originate residential mortgages to qualified borrowers. Community banks know their customers. They can look beyond the numbers and take into account the unique situation of each borrower. The Economic Growth, Regulatory Relief, and Consumer Protection Act takes advantage of this local knowledge by giving small banks and credit unions relief from some of the law’s more punishing regulations when they make loans to creditworthy borrowers.
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