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SMALL BUSINESS NEWS

Jun 2018

 

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Changes To Dodd-Frank Law Could Be Good For Your Small Business

Recently the President signed into law a bill that made changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act which was made law in 2010.

Many believe that the act was long overdue for some needed changes.  The Dodd-Frank Wall Street Reform and Consumer Protection Act was created to fix problems in the financial system that caused the financial crisis in 2008-2009.  However, many elements of the law negatively impacted the financial industry [ in particular the smaller banks] which led to less lending and financing of startups and small businesses.

Small banks comprise 99.5% of all U.S. banks.  More than 80% of agricultural loans and 50% of small business loans come from community banks. 

The rules imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act had the following negative effect on small businesses.

 

1.  A reduction in the number of small banks that are available to lend to small businesses.  Since 2010, the number of commercial banks in the U.S. plummeted from 6,623 to 4,888. Meanwhile, only 15 banks hold more than 50% of U.S. banking assets.

 

2.  A reduction in the number of small banks that are willing to lend to small businesses.  Since 2008 lending to small businesses has decreased by 15%, while lending to big businesses has increased by 35%.

 

3.  The creation of more larger banks that are not willing to lend to small businesses.  The high cost of meeting data collection and reporting requirements forced smaller banks to sell out or merge with larger banks who want to focus on large customers.

 

4.  A reduction in the number of services.  Increased compliance costs meant that banks had to shift resources to meet stringent requirements which caused many small banks to reduce the number of services that they provided.

 

5.  It deliberately kept small banks small.  Banks with over $50 billion in assets had to meet more stringent requirements [such as stress test].  As a result many chose not to grow beyond that limit. 

 

6.  Banks with less than $10 billion in assets could not tap into all of the funding available to them.  Banks with less than $10 billions in assets were subjected to the Volcker Rule [the rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank's own accounts].

The new law brought about the following changes:

 

1.  It raises to $250 billion in assets from $50 billion the threshold for banks to face stricter Federal Reserve oversight.

 

2.  Firms below the new threshold would no longer face yearly Fed stress tests or higher capital requirements, and would not have to submit a plan for the bank to be taken apart upon failure without causing a crisis.

 

3.  The bill frees small banks with less than $10 billion in assets from the Volcker Rule.

 

4.  It change the way that custody banks will calculate their leverage ratio by allowing them to exempt deposits they have with central banks (like the Fed, ECB, etc.).  This will boost the figures that those banks can make available for lending.

 

5.  It calls for the Federal Deposit Insurance Act to reduce their reporting requirement from smaller banks.

 

6.  It permits the Federal Reserve Board (FRB) to allow smaller banks to carry an increased debt level [from $1 billion to $3 billion].

The bottom line is that it means that there will be more smaller banks with more funds available to lend to startups and small businesses.

 

Sources:
The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155)
White House: [The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155)]
H.R.4173 - Dodd-Frank Wall Street Reform and Consumer Protection Act
ICBA
ThirdWay

By Bill Williams

 

 

 

 

 

 

 

 

 

 
 

 

  
 

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