Regulatory Outreach for Student Education

Engaging Students in the Debate Over Financial Services Reform

Today’s debate over regulatory reform is a watershed activity in the careers of financial industry professionals. Years ago, similar debates over mandated pre-funding of pension liabilities (ERISA) and the reunification of investment banking with commercial banking (Glass Steagall's repeal) changed the direction of financial market evolution. Opinions may differ on the merits of those changes, but no one disputes their significance.

Without question, college students and young professionals should be well-versed in the issues involved in today's debate. The Regulatory Outreach for Student Education (ROSE) program is the Center's way to give top students, tomorrow's business and finance leaders, opportunities to experience the financial regulatory process up-close.  The ROSE program is designed to put students in touch with the regulators, policy-makers, and industry leaders who are currently shaping the financial regulatory landscape.  We then challenge them to research and articulate their own positions on the most intriguing and interesting issues.  

ROSE Program Blog

Sunday, April 23, 2017

Are Bank Regulations Harming Small Businesses?

Fed Survey Finds Small Businesses Face Credit Challenges


Author: David Schwartz J.D. CPA

A Federal Reserve Report published on April 18, 2017 found that U.S. small businesses are facing hurdles in obtaining much-needed financing for growth. The study indicated that small businesses presently face significantly more stringent credit conditions when approaching their traditional sources of loans for equipment and expansion. The Fed report itself does not point the finger at regulation as the cause for this restriction in the ability of small businesses to access credit. However, large banks have had to tighten credit conditions significantly as a result of increased capital requirements, liquidity restrictions, and stress tests. Because these big banks are the primary source of the for all business financing in the U.S., and the number one source of loans to small businesses, any restrictions on the flow of financing arising out of new banking regulation will perforce affect small businesses. 

 

While many critics of the Dodd-Frank reforms have complained that new regulation was stifling lending in the small business sector, up until now there has not been sufficient work done to support preliminary reviews of bank loan growth and anecdotal evidence. The April 18, 2017 Fed report is based on a surveys of more than 400 business organizations in communities across the United States. It provides valuable data that can demonstrate the effect that increased bank regulation is having on small business growth. Drilling down into the survey results, the study found that faced with tighter credit conditions when seeking bank loans, business owners are forced to rely on self-funding like home equity loans instead of bank financing.[1] Inability to access much larger sources of financing through banks and being forced to self-finance is an obvious impediment to expansion and growth of these businesses, resulting in turn in a drag on employment and wage growth as well. This report provides some valuable support for the proposition that small businesses are not having their borrowing needs satisfied, and that is due in part to tightened credit restrictions arising from increased regulation on large banks, the primary lenders to small businesses.  

 

The full text of the Federal Reserve's Small Business Credit Survey is available via: https://www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-Report-EmployerFirms-2016.pdf

 

[1] The survey finds that “the most common way firms cope with challenges is by self-funding—76% of business owners used personal funds to fill the gap. Firms also reported taking on additional debt (44%), making a late payment (44%), or downsizing (43%)."

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